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HMRC internal manual

Corporate Finance Manual

Loan relationships: the history of the legislation

The history of the legislation

Until 1996 there was little specific legislation on the taxation of corporate debt. Companies were, for the most part, taxed according to general tax rules (such as those on ‘short’ and ‘annual’ interest, and ‘charges’), and on the basis of case law on whether amounts were revenue or capital (see BIM35000). Interest was mostly taxed or relieved on a paid basis.

Finance Act 1996 made fundamental changes to the taxation of debt and interest. The idea behind the legislation was broadly, to follow accountancy practice in recognising profits and expenditure, and to move away from the revenue/capital divide.

Finance Act 1996, brought in a self-contained body of legislation with effect from 1 April 1996 (FA96/PT2/CH4). It introduced a special tax regime for companies applying to ‘loan relationships’, which were defined as ‘money debts’ arising from ‘the lending of money’, to distinguish them from other receivables from the supply of goods and services. Interest, expenses, and all other profits, gains and losses relating to loan relationships were taxed, for the most part, according to how such amounts were reflected in the accounts.

The legislation was then rewritten as part of the Tax Law Rewrite project and now appears at Parts 5 and 6 of the Corporation Tax Act 2009.

  • CTA09/PT5 deals with the main rules on loan relationships.
  • CTA09/PT6 deals with the rules on ‘relationships treated as loan relationships’ - financial arrangements to which the loan relationships rules apply, but which do not, legally, arise from the lending of money.

Two important changes to the original FA 1996 rules to note are as follows.

Foreign exchange gains and losses

Before FA 2002, separate legislation in FA 1993 covered the computation and taxation of profits and losses from exchange differences arising from transactions in foreign currencies (forex). Following FA 2002, such exchange gains and losses are included in the calculation of the overall profit or loss on the loan relationship.

Changes to accounting standards

Accounting practice on the disclosure, presentation, recognition and measurement of financial instruments changed as a consequence of the introduction of International Accounting Standards with effect from 1 January 2005. As a result, the tax rules on loan relationships (and on derivative contracts) were brought even more closely into line with accounting practice.

This had a particular effect on the rules on ‘hybrid’ debt such as convertible and index-linked bonds. Before 1 January 2005, such instruments were taxable partly under the chargeable gains legislation, and certain expenses were denied relief. For periods of account starting on or after 1 January 2005, such instruments are taxable partly within the loan relationships rules and partly under the derivative contracts rules.

Earlier versions of the legislation

The guidance in CFM30000 covers the legislation as it currently stands. For guidance on earlier versions of the legislation see CFM80000.