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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Loan relationships: group continuity: meaning of loan relationships with ‘equivalent’ rights and obligations

Debt with equivalent rights and obligations

CTA09/S338(1) and (2) provide that references, to one company replacing another as party to a loan relationship, include references to a company becoming party to a loan relationship with equivalent rights and obligations. The concepts of ‘equivalent rights’ and ‘equivalent obligations’ are defined in CTA09/S338(3) and (5).

Rights under one loan relationship are equivalent to rights under another if they entitle the holder to

  • the same rights, against the same person, to capital, interest and dividends, and
  • the same remedies for enforcing those rights

even if there is a difference in the form, nominal amount, and method of transfer.

Obligations under one loan relationship are equivalent to obligations under another if they subject the holder to

  • the same obligations, to the same persons, as to capital interest and dividends, and
  • the same remedies for enforcement of those obligations

even if there is a difference in the form, nominal amount, and method of transfer.

This provision prevents a company avoiding the effects of Chapter 4 by selling, say, government stock on the market while the buyer simultaneously sells stocks of exactly the same kind to another group company.

Example

KJ Ltd and GH Ltd are members of the same group.

  • KJ Ltd buys loan notes on the market.
  • KJ Ltd sells the loan notes to IP Ltd, a third party.
  • IP Ltd sells the notes on the market and buys similar loan notes.
  • IP Ltd sells the loan notes to GH Ltd.

CTA09/S336 ensures that Chapter 4 can still apply even though GH Ltd did not receive the same loan notes that KJ Ltd had acquired.

The ‘equivalence’ requirement was considered in a First Tier Tax Tribunal Decision, HBOS Treasury Services Plc (now HBOS Treasury Services Ltd) v HMRC Commissioners [2009] UKFTT 261, TC208. HMRC staff should seek advice from CTIAA (Financial Products Team) where there is doubt about whether old and new contracts are equivalent.

Novation of liabilities

A company that has borrowed money may wish to transfer the debt to another group member. Provided the lender agrees, this can be achieved by novation of the debt (see CFM11170). As the name implies, a new debt is substituted for the original debt: the lender remains the same, but the borrower changes. Where a liability is novated on or after 9 April 2003, S336(5) ensures that Chapter 4 applies to the transfer, since the new debtor company has entered into a loan relationship with equivalent obligations.

In the case of Greene King No 1 Ltd v Adie (SpC465, 2005), the Special Commissioners held that the group continuity rules did not apply to a novation of a liability before that date. HMRC staff should consult CTIAA (Financial Products Team) where the point at issue concerns intra-group novation of a debtor loan relationship before 9 April 2003.