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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Loan relationships: computational rules: GAAP: amounts in equity

Amounts recognised in equity or shareholders’ funds

In some circumstances, a debit or credit relating to a loan relationship may be recognised in equity or shareholders’ funds, rather than in the profit and loss account (or income statement), or the statement of total recognised gains and losses (or statement of changes in equity).

This may happen if, for example, a company issues ‘perpetual debt’ - debt that gives the creditor no automatic right to repayment. If the terms of the debt are such that the debtor has no contractual obligation to hand over cash as a future date, it may under IAS 32 be classified as equity rather than a financial liability (see CFM21100). This means that, for accounting purposes, interest paid by the company will be treated as a dividend. For tax purposes, however, it is the legal form of the obligation that is important - the debt remains one representing a loan relationship, and the interest is still interest.

CTA09/S321 ensures that credits and debits that, in accordance with GAAP, are recognised in equity or shareholders’ funds are taken into account for loan relationships purposes. Thus, in the example above, the company would get relief for the interest it pays. But it must follow the accounting used, so that if interest is treated as a dividend and accounted for on a due and payable basis rather than being accrued, that treatment must be followed.