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HMRC internal manual

Corporate Finance Manual

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

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

Conditions A to D

CFM33120 describes the anti-avoidance rule that applies with effect from 6 March 2006 to arrangements in which derecognition arises as a result of a loan relationship being matched with preference shares that have equivalent cash flows.

Further avoidance schemes were devised in which a loan relationship is not fully recognised as a consequence of its cash flows being matched with those arising on other financial instruments. In the example described in CFM33120, instead of paying preference share dividends to the parent, the subsidiary might make payments in respect of a capital contribution from the parent. Or in return for additional shares or an increased interest in a fellow group company it may undertake to make payments equal to the cash flows it receives in respect of the loan.

As with the original derecognition avoidance schemes, the effect of not fully recognising the cash flows relating to the matching financial arrangements is that credits are said not to be taxable on the creditor loan relationship not recognised in the accounts, while amounts not recognised in respect of the liability would not be deductible.

Accordingly, further amendments were made to the legislation to deal with such schemes. For periods beginning before 6 December 2010, the rule applies where either condition A, B, C or D is met.

Condition A

Condition A is where a creditor loan relationship is derecognised as a result of its cash flows being matched with a debtor loan relationship. This is the basic derecognition scheme described in CFM33120. Condition A applies for periods ending on or after 22 March 2006.

Condition B

Condition B is where a creditor loan relationship is derecognised as a result of its cash flows being matched with a capital contribution. It applies for periods ending on or after 9 May 2007, in respect of amounts relating to any time after 9 May 2007.

Condition C

Condition C is where a creditor loan relationship is derecognised as a result of its cash flows being matched with securities forming part of the company’s capital. It applies for periods ending on or after 22 April 2009, in respect of amounts relating to any time after 22 April 2009.

Condition D

Condition D is where a creditor loan relationship is derecognised as a result of its cash flows being matched with an interest in another company’s shares, or a partnership’s profits or capital, or a trust. It applies for periods ending on or after 22 June 2010, in respect of amounts relating to any time after 22 June 2010.

Periods of account beginning on or after 6 December 2010

For periods of account beginning on or after 6 December 2010, the derecognition rule was amended so that it applies as a generic rule anti-avoidance rule wherever a company is party to tax avoidance arrangements. Conditions A to D were repealed. CFM39200+ explains the operation of this rule for periods of account beginning on or after 6 December 2010.