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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Loan relationships: computational rules: company ceasing to be UK resident

Company ceasing to be UK resident

Where a loan relationship is transferred between two group companies, and the group continuity rules in CTA09/PT5/CH4 (CFM34000+) apply, the effect will be that any accounting profit shown by the transferor company will be brought into account for tax purposes only when there is a disposal of the loan relationship outside the group.

CTA09/S333 (originally introduced by FA 2004) counters avoidance schemes which might seek to exploit the mismatch between the accounts and the tax position by contriving that the ‘deferred’ profit is never brought into account by the group. For example, a transferee company might change the place of its central management and control, so that it ceases to be UK resident, and then dispose of the contract while non-resident.

CTA09/S333 applies to all loan relationships held by a company that ceases to be resident in the UK - there is no requirement that they should have previously been transferred between group companies. It applies where the company migrates on or after 17 March 2004.

When the company ceases to be UK resident the loan relationships rules apply as if it had disposed of all its loan relationships at their fair value immediately before ceasing to be UK resident, and immediately reacquired them at the same value. The deemed disposal is therefore treated as a related transaction (CFM31120), and credits or debits are brought into account under the normal rules.

CTA09/S333 operates even-handedly - the result of the deemed disposal may be a profit or a loss. If, however, the main purpose of the company migration is a tax avoidance purpose, the unallowable purposes provision at CTA09/PT5/CH15 may operate to wholly or partially disallow debits arising from the related transaction.

CTA09/S334 applies the same rule if a loan relationship is held for the purposes of a UK permanent establishment (PE) of a non-resident company, and is transferred to or appropriated by a non-UK part of the company, without the transfer involving a normal related transaction.

There is an equivalent rule for derivative contracts. See CFM53110.