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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Loan relationships: computational rules: amounts ‘fairly representing’ profits and losses

Credits and debits, taken together, must fairly represent the profits and losses, interest and expenses on the loan relationship

Under CTA09/S307, the amounts to be brought into account as credits and debits for tax purposes are those which ‘when taken together, fairly represent for the accounting period in question’

  • all the profits or losses of the company arising to it from its loan relationships and related transactions
  • all interest under those relationships
  • all expenses incurred for the purposes of those relationships and transactions.

The ‘fairly represents’ rule over-rides the accounting treatment

S307 refers to the ‘fairly represents’ rules as a ‘general principle’. S307(6) says that the requirement to compute credits and debits in accordance with UK GAAP is subject ‘in particular’ to the ‘fairly represents’ rule, which thus takes precedence over the accounting treatment.

‘Taken together’

The reference to ‘taken together’ is important, as it shows that in some cases the legislation looks at credits and debits as individual positive or negative entries in the company’s books and accounts, rather than always looking at net amounts representing profits and losses.

For example, a market discount accruing for a particular period is a profit representing the difference between the debit for the acquisition of the loan relationship and the credit for the redemption of the debt. Only that part of the difference that relates to the particular period is brought into account because only that part ‘fairly represents’ the profit for that period.

Interest, profits and losses, and expenses

CFM33030 explains the meaning of interest.

CFM33050 covers the other types of profits and losses on a loan relationship.

CFM33060 looks at the expenses that are allowable under the loan relationships rules.