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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 arising from the issue of securities: when is a security issued?

Issue of company securities: debt instruments

CFM31050 explains that CTA09/S303(3) extends the normal meaning of ‘loan relationship’ to include money debts arising where an instrument is issued representing security for the debt, or the rights of a creditor in respect of the debt.

This extended meaning will for instance apply where a company issues securities or debentures as consideration for acquiring other assets. For instance loan notes are sometimes issued in exchange, wholly or in part, for shares or securities of another company acquired in a buy-out or take-over. Because there has been no ‘lending of money’ such securities would not be loan relationships within the mainstream definition. S303(3) recognises that such securities are more akin to loan relationships than simple money debts, and that it is appropriate to extend the meaning of loan relationship to include them.

The following general guidance will help identify when a money debt is turned into a loan relationship by S303(3).

Meaning of ‘instrument’

Any legal document is an ‘instrument’. However in order to be an ‘instrument’ within the narrower meaning of S303(3), it must have been issued for the ‘purpose’ described in that subsection. Thus for instance an invoice is not a S302(3) instrument, because its purpose is to record a sale and demand payment, not to represent or secure the creditor’s rights. Similarly if two companies contract for a supply of services, with a monthly service charge payable in arrears, the series of service charges does not become a loan relationship just because there is documentation.

Meaning of ‘issued’

The word ‘issued’ is not defined and takes its ordinary meaning, according to its context. The word does, however, require a unilateral act by the issuer, in the sense that he issues the thing in question independently of the person(s) to whom it is issued. It will not therefore apply to a bilateral agreement entered into jointly - while such a document is no doubt an ‘instrument’, it is not apt to be described as having been ‘issued’ by any person.

Applying these principles to the examples at CFM31050, it is clear that Example 2, but not Example 1, involves the issue of a S303(3) instrument. The £500,000 money debt for the purchase of land is treated as a full loan relationship.