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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: fair value accounting

Fair value accounting

Transfers of loan relationships where the transferor uses fair value accounting are not subject to the usual group continuity treatment. This part of the group continuity rule has been subject to a number of changes. HMRC staff should consult CTIAA (Financial Products Team) where a transaction does not appear to correspond to the treatment described below.

CTA09/S341 applies instead of S340 where the transferor uses fair value accounting. ‘Fair value accounting’ is defined under S313(5). The transferor must bring into account the fair value of the loan relationship, and the transferee company is regarded as acquiring the loan relationship at:

  • the same as the amount brought into account by the transferor;
  • less any discount that the transferor is required to bring into account.

CTA09/S341(5) ensures that a loan relationship falls within the terms of S339 only if the debits and credits to be brought into account for tax purposes in respect of the loan relationship are determined on a fair value basis, regardless of the actual accounting. This is to ensure that a when a loan between connected parties is transferred intra-group the transfer is within S336 to S339 and not S341. A connected party loan may be presented in the accounts of the creditor company on a fair value basis, but because it is connected with the debtor company, the creditor company is required to calculate the debits and credits as if the loan were valued at amortised cost. See the example at CFM34080.

S341(5) ignores the basis on which the loan is presented in the accounts and brings the loan within S339 if the debits and credits for tax purposes are calculated on the basis of fair value. This ensures that where fair value accounting is mandated for tax purposes then S341 will apply regardless of actual accounting.

Discounts

CTA09/S341(4) provides that where a discount within the meaning of CTA09/S480(5) arises on a related transaction then: -

  • the consideration to be brought into account by the transferor company under S338; or
  • the amount brought into account under S341

is increased by the amount of the discount.

CTA09/S481(5) provides that a particular instance of where a discount arises is where

  • a company disposes of property for a deferred consideration,
  • that deferred consideration is greater than the amount that would have been paid for the property if the price had been paid at the time of disposal and
  • the difference, the excess, represents a return on an investment of money at interest

This rule ensures that where compensation is paid to the vendor for being out of their money in the form of an increased amount of sale price this increase is treated as a discount for the purposes of S481.

See the examples at CFM34080.