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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Loan relationships: money debts: do they arise from the lending of money?

Money debts that do not arise from lending money: ‘non-lending relationships’

Not all money debts arise from the lending of money. The legislation refers to such debts as ‘relevant non-lending relationships’. They are brought within the loan relationships rules under CTA09/PT6.

Interest, exchange gains and losses, and (for periods beginning on or after 1 January 2005) impairment losses on such debts, where payment falls to be taken into account as a receipt of a trade or a property business, are within the loan relationships provisions.

Full details on the taxation of such debts is at CFM41000.

Trade debts

A company may be a debtor because it has not paid for goods and services it has received. There is a money debt, but it did not arise from lending money. So trade debts are not loan relationships. (But trade ‘bad debts’ are within the loan relationships rules, see CFM41030.)

A trade debt does not become a loan just because it has been outstanding for a long time. But if the creditor company lends money to the debtor company so that it has the funds to repay the debt (by book entry, or by cash changing hands), there will be a new agreement between the parties (not necessarily in writing), which is separate from the trade debt. This is a loan relationship because it is a debt for lending money.

Finance leases and hire purchase

Debts arising under finance leases and hire purchase agreements do not in law involve any lending of money, even though in economic substance and in accounting terms they may be regarded as the equivalent to debt finance. They relate instead to the right to use an asset and the obligation to pay rentals under a lease.

Other examples of debts that do not arise from the lending of money

  • Outstanding court awards for monetary damages.
  • Unpaid consideration on the purchase of an asset.
  • Directors’ loan accounts consisting only of undrawn/overdrawn remuneration etc.
  • Overpaid or underpaid quarterly instalment payments of corporation tax.

Inter-company accounts

Balances on inter-company accounts may arise from the lending of money where one group company has borrowed money from another. These are loan relationships.

Where the balances represent unpaid amounts for goods and services supplied by one group company to another, they are trade debts, which are not loan relationships.

Sometimes a company will make payments to a third party on behalf of another group company, for example, because the latter company does not have a bank account. Such an arrangement will constitute a money debt between the two companies, but it may not amount to a loan relationship unless there is supporting evidence, for example, in the form of an existing agreement between the companies, that provides for payments made by one company on behalf of another to be treated as a loan.

In some cases, an instrument may be issued to ensure that the debt is treated as arising from lending of money be virtue of the issue of a debt instrument. See CFM31050 to CFM31060.