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HMRC internal manual

Corporate Finance Manual

Loan relationships: computational rules: GAAP: amounts ‘not fully recognised’ for accounting purposes

This guidance applies for periods of account beginning before 6 December 2010

Amounts not fully recognised for accounting purposes

Finance Act 2006 inserted a new rule in the loan relationships legislation to deal with cases where the accounting treatment does not fully bring into account the full amount of profits and losses on transactions, which applies to periods of account ending on or after 22 March 2006. In relation to periods beginning before that date, it applies to only bring into account amounts relating to any time after 22 March 2006. The rule is now at CTA09/S311 and S312.

Where assets and liabilities are offset against each other, generally accepted accounting practice may permit or require the whole or part of the income arising on those assets or liabilities to be presented as a net amount, so that amounts that could be brought into account gross are not brought into account.


A UK parent subscribes £10 for ordinary shares and £100m for preference shares in a new subsidiary. The subsidiary invests the £100m in debt instruments (for example, gilts).

The terms of the preference shares are that the cash flows are matched to those on the debt instruments, so that the dividends paid exactly match the interest received.

Under IAS32 or IAS39 the subsidiary does not ‘recognise’ either the debt instrument or the shares.

The effect of CTA09/S312

For periods before the new rule came into effect, HMRC’s view is that this ‘derecognition’ does not apply for tax because the accounting treatment does not ‘fairly represent’ the profits (see CFM33020). However, CTA09/S312 makes it clear that the company has to bring credits and debits into account on the assumption that an amount in respect of the whole of the relationship is recognised in determining the company’s profit and loss for the period - thus importing S307.

CTA09/S312 makes no difference to straightforward arrangements where, for example, interest receipts and payments are offset against each other. However, where a credit is not recognised or is offset (for example, an interest receipt offset by an equal and opposite dividend payment), S312 ensures that the receipt is still brought into account for tax purposes. If debits are brought into account they must not exceed the credits also brought into account.

Other computational rules within the loan relationships legislation (for example, connected persons and late interest - CFM35800+, or unallowable purposes - CFM38100+) will still apply. For example, where interest to a connected person is disallowed until paid, any offsetting interest receipt in that company will be taxable in accordance with the normal loan relationships rules.

‘Derecognition’ here means that no amounts are brought into account, or only amounts in respect of part of the asset or liability.

See CFM33122 for guidance on conditions A to D at CTA09/S311.

See CFM39200+ for guidance applying for periods of account beginning on or after 6 December 2010.

See CFM56110+ for the equivalent rules for derivative contracts.