HMRC internal manual

Corporate Finance Manual

Loan relationships: what are loan relatonships: the meaning of debt


What is debt?

A debt exists where one party has a legal obligation to transfer cash, goods or services to another. If the creditor has no legal right to the consideration, there is no debt.


JK Ltd exchanges contracts with MN Ltd for the purchase of property costing £30,000 on 31 December. The completion date is the following 19 January. There is no legal right to payment until 19 January. A debt only comes into existence on 19 January if the consideration is unpaid at that date.

Debts for fluctuating amounts

A debt doesn’t have to be for a fixed amount to represent a loan relationship. It includes amounts which vary (CTA09/S476). For example, the amount repayable could be linked to indexes such as the Retail Price Index.

Debt involves repayment

The general characteristic of a debt is that the creditor will, at some stage, be repaid. This does not necessarily mean that the creditor has an immediate right to sue for repayment. A debt may be repayable at a stated future date or dates - for example, the issue terms of a company debenture or loan note will include a future date on which it matures.

In contrast, someone who contributes funds to a business by contributing equity funding to a company, or capital to a partnership, has no legal right to repayment. The funds are fully at risk in the business. Similarly, a grant or contribution to a business will not normally give rise to a debt, since the money does not have to be repaid.

Repayment may be contingent on an event

Problems can arise where repayment is contingent on an event that may or may not happen. For example, bonds issued by a financial institution as regulatory capital may be repayable only at the option of the debtor (or if the issuer defaults on interest or goes into liquidation).

No debt exists in the extreme case where someone has only a contingent right to an unascertainable sum that may become payable at an unknown future date - see the comments of Lord Wilberforce in Marren v Ingles, 54TC76. The situation is less clear where the sum is ascertainable from the outset, but may or may not be repayable depending on events. The stamp duty case of Mortimore v CIR (1864) 2H&C815 provides an example where a debt was held to exist, albeit that the repayment was dependent on a contingency.

The courts took a pragmatic view in the case of Smart v Lincolnshire Sugar Ltd (20TC643), which concerned a contingently repayable trading subsidy. The Court of Appeal and the House of Lords held that this was not a loan. Lord Wright, in the Court of Appeal, said that the subsidy had none of the ‘marks’ of a loan. Not only was there no “firm or unqualified obligation to repay”, it did not carry interest, and was “not an ordinary mercantile transaction by way of loan”.

On this basis, a contingently repayable amount is likely to be a debt - and hence a money debt within CTA09/S303 - if it has the hallmarks of a loan: for example, if evidenced by a debt instrument, carries interest, ranks above share capital in a liquidation, and so on. Accounting treatment may be one of these ‘marks’, but is not in itself decisive.

However, the case of C J Wildbirds Food Limited v CIR, TC/2017/03196, shows that it very unlikely that a transaction, documented as an advance of money intended to create a debt, will not be treated as a transaction for the lending of money even if, at the time the advance is made, there is a high probability of eventual default. This characteristic alone, is insufficient to put the arrangement on all fours with that in the Lincolnshire Sugar case.