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HMRC internal manual

Corporate Finance Manual

Loan relationships: computational rules: GAAP: capital expenditure

Capitalised amounts

Profits and losses from loan relationships include capital profits and losses (CTA09/S293(3)), but amounts brought into account are those recognised in a statement of the company’s profit or loss for the period or in reserves (CFM33100).

Interest and other expenses relating to a loan taken out to fund capital expenditure, may be taken to a fixed capital asset account. Without special provision, the company may not get relief under the loan relationships legislation.

CTA09/S320 applies where, in accordance with generally accepted accounting practice, amounts arising on a loan relationship are taken into account in determining the value of a fixed capital asset or project. Despite that treatment, the credit or debit must be brought into account under the loan relationships rules. This treatment is mandatory.

This does not mean that any debit or credit in a company’s accounts will automatically give rise to tax relief or a tax charge. There must be a gain, profit or loss on a loan relationship - see example of ‘work in progress’ below. Nor does it apply to debits on intangible assets which fall under CTA09/PT9.

Computational adjustments must be made when amortisation of an asset is taken to profit and loss account, or when an asset is sold, and the interest then appears in the profit and loss account.

Development costs

This treatment also applies where development costs, for example in the development phase of a new product, are capitalised. If the development costs are correctly treated as a fixed capital asset, the company will get relief for interest and other associated cost when they are incurred.

Work in progress

Work in progress of, for example, a property developer, is not a fixed capital asset or project. Work in progress features in the profit and loss account in the form of stock. It is circulating capital and not a fixed asset of the company (see the Business Income Manual BIM35000+ on the distinction between fixed and circulating capital). Interest payable will be a debit in the profit and loss account but counterbalanced by an increase in work in progress. This does not mean that the interest has not been effectively debited to the profit and loss account. No adjustment will therefore be needed to ensure that relief is given for interest paid and taken to work in progress.

Incidental costs of purchase of shares in a subsidiary

Normally, it is correct accounting practice to spread the costs of loan finance used to buy shares. However, CTA09/S320 applies to allow relief in the year in which the costs were incurred and capitalised where

  • the shares are held as a fixed capital asset, and
  • the incidental costs come within CTA09/S307(4), and
  • it is generally accepted accounting practice to capitalise such costs.