CFM33162 - Loan relationships: core rules: pre-2016 rules: amounts ‘fairly representing’ profits and losses

CTA09/S307(3) (before amendment by F(2)A15)

This page of guidance only applies for company periods of account beginning before 1 January 2016. For the latest position see CFM33010.

Under S307(3), as it stood before amendment by F(2)A15, the amounts to be brought into account as credits and debits for tax purposes were 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.

After the F(2)A15 revisions these have become the "matters" set out in S306A - see CFM33020.

Fairly Represents

The use of the formulation 'fairly represents' in S307(3), as it stood before amendment by F(2)A15 was a matter of some debate. One view was that the language was only intended to identify which actual debits and credits when taken together represented the matters within the scope of the loan relationships provisions needed to be identified. The other view, advanced by HMRC in litigation, was that the requirement of "fairness" required more than simple identification and that the amounts disclosed in accounts might be rejected, if they did not provide a fair representation of amounts of income, gain, or loss. Similarly, an amount not recognised in accounts could be brought into account for tax if this was necessary to provide a fair representation of income, gains or losses.

The two tax cases described briefly below were decided on the basis consistent with HMRC's view that, in appropriate circumstances where the amounts disclosed in a company's financial statements were not a fair representation of the matters falling to be taxed under the loan relationships provisions, different amounts should be brought into account for tax, even if there was no separate statutory rule to override the actual debits or credits in financial statements.

In the case of Union Castle Steamship Company Ltd v HMRC [2020] EWCA Civ 547, a derivative contract was derecognised, for accounting purposes, in consequence of the issue of preference shares giving rise to a debit in the company's financial statements. The Court of Appeal determined that this debit did not fairly represent a loss in respect of a derivative contract. It was considered that there was no difference as regards this issue between the treatment of loan relationships and derivative contracts.

In the case of GDF Suez Teeside Ltd. v HMRC, [2018] EWCA Civ 2075, a company was party to a creditor relationship that was not recognised in its financial statements because its value could not be readily or reliably ascertained. The creditor relationship was transferred to a newly created foreign subsidiary in exchange for shares. This gave rise to no credit in the transferor's financial statements, even though in the transferee's financial statements it was disclosed at fair value. This transfer was a related transaction of a loan relationship. The Court of Appeal held that the accounting treatment did not fairly represent the profit arising from the related transaction. A credit equal to the value of the shares received as consideration should therefore be brought into account under the loan relationships provisions.

The legislation as modified by F2(A)15 does not contain the "fairly represents" language. But, transactions similar to those in the cases described above would be expected to fall within the ambit of the Regime Anti-Avoidance Rule in CTA09/S455B, see CFM 39500, if not caught by more specific anti avoidance rules.

‘Taken together’

The reference to ‘taken together’ was important, as it showed 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

CFM33010 explains the current rules. CFM33030 explains the meaning of interest under a loan relationship.

CFM33050 sets out guidance on profits and losses on loan relationships and related transactions. CFM33060 looks at the expenses that are allowable under the loan relationships rules.