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HMRC internal manual

Corporate Finance Manual

Loan relationships: a short guide: deemed loan relationships

Deemed loan relationships

Certain arrangements do not meet the definition of money debts arising from a transaction for the lending of money. The rules on these are set out in CTA09/PT6. The legislation refers to these as ‘relationships treated as if they are loan relationships’. For convenience, the Corporate Finance Manual refers to these as deemed loan relationships.

References to Part 5 of the Corporation Tax Act 2009 include references to Part 6 (CTA09/S294(2), so the computational provisions, definitions and other rules set out in Part 5 also apply to deemed loan relationships in Part 6.

Money debts

The main case of a deemed loan relationship is where there is a ‘money debt’, but it does not arise from lending money. The most frequently encountered examples are trade debts and debts arising in a property business. Other examples are

  • debts arising under finance leases and hire purchase agreements
  • outstanding court awards for monetary damages
  • unpaid consideration on the purchase of an asset.

Such debts are not themselves taxable as loan relationships, but

  • interest
  • foreign exchange gains and losses
  • impairment losses
  • discounts

arising on such amounts are taxable within the loan relationships rules.

So an impaired (bad) bad trade debt is allowable on the same principles that apply to financial assets, rather than the rule that formerly applied to ‘bad and doubtful’ trade debts.

Alternative finance

‘Alternative finance arrangements’ (Islamic finance) are also brought within the rules on relationships treated as loan relationships. These rules were introduced to provide certainty for the taxation of Shari’a compliant financial arrangements, which do not carry interest, and do not in law amount to a loan.

Other deemed loan relationships

Other examples of deemed loan relationships involve collective investment schemes, shares with guaranteed returns, returns from partnerships, manufactured interest, repos, and certain life insurance contracts. See CFM40000 onwards for more on these as for more on money debts that do not arise from lending of money, and on the alternative finance rules.