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HMRC internal manual

Corporate Finance Manual

Loan relationships: group continuity: notional carrying value

Group continuity: transfers on or after 16 March 2005

A transfer between group companies is treated as consideration giving rise to neither a gain nor a loss. Whatever accounting treatment is adopted by the transferee company, no amounts drop out of account when the loan relationship is transferred.

For the purposes of computing loan relationship credits and debits, the transferor company is deemed to have disposed of the loan relationship for its notional carrying value. The transferee company is treated as having acquired the loan relationship for the same notional carrying value.

Notional carrying value means the amount that would be the carrying value of the loan relationship (whether it is an asset or a liability) in the transferor’s accounts had it drawn up a balance sheet immediately before it ceases to be a party to the loan relationship. But CTA09/S424(4) further provides that ‘carrying value’ has the same meaning as it has in CTA09/S316. (This is the case even where the transfer happens in an accounting period prior to S316 coming into force).

This means that the notional carrying value, for the purposes of S338

  • will include accrued amounts, amounts paid or received in advance, and impairment losses, but
  • is subject to adjustment where any of the tax provisions set out in S316(4) apply. This includes adjustments where CTA09/S347(2) imposes an amortised cost basis (see CFM33130), or any bifurcation of a loan relationship with an embedded derivative, under CTA09/S415(2). They also include Chapter 4 itself, so that if necessary the carrying value is adjusted for the effect of any previous intra-group transfer to which S338 has applied.

See the examples at CFM34060.

Interaction with transfer pricing

By its nature, the group continuity rule means that debits and credits brought into account for tax purposes may differ from those shown in the accounts. In particular, it may treat the transfer of a loan relationship between group companies as occurring at a price that is not an arm’s length price. CTA09/S340(7) ensures that the transfer pricing provisions in TIOPA2010/Part 4 do not apply to debits and credits that are brought into account in accordance with the group continuity rule (for accounting periods beginning on or after 1 April 2010).