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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Loan relationships: connected parties: a summary of the key rules

Connected parties: summary of key rules

The key points relating to loan relationships and connected parties are as follows.

Connected companies must use the amortised cost basis

CTA09/S349 requires connected companies to use the amortised cost basis (CFM21640) in computing profits and losses from loan relationships. If it uses fair value, or any other basis, in its accounts, it must make adjustments to those accounts figures for tax purposes, unless

  • the loan relationship is held in exempt circumstances (see CFM35130), or
  • particular rules require the company to use fair value (for example, in the case of holdings in unit trusts and offshore funds, treated as creditor relationships - CFM43000, or for creditor relationships involving ‘reset bonds’ - CFM39040.

CFM35100 onwards explains what is meant by a connected company, and the computational rules for companies that begin to be, or cease to be, connected.

Impairment losses between connected companies are restricted

Impairment loss is defined in CTA09/S476.

Relief for impairment losses (or, for accounting periods beginning before 1 January 2005, bad debts) are restricted in many circumstances. CFM35300 onwards explains the rules.

Impairment losses between consortia companies are restricted

Relief for impairment losses is also restricted for loan relationships between consortia companies. See CFM35600 onwards.

Relief for late-paid interest may be restricted

Debits for interest which is payable by a debtor company to a connected creditor and which is not paid within 12 months of the end of the accounting period are in certain cases allowable only on a paid basis.

See CFM35800 for more details.

Relief for discounted securities may be postponed

Amounts of discount payable by a debtor company to a connected creditor may be allowed in some cases only when the discounted security is redeemed. This is similar to the late interest rule. See CFM37200 for more details.

Fair value accounting may be required where connected parties derive benefit from creditor relationships

Where a company’s return on a creditor loan relationship is less than a commercial return and a connected company derives a benefit instead, the fair value of the company’s rights must include the fair value of the benefit derived by the connected company. See CFM39035 for more details.

Periods starting before 1 January 2005

For periods starting before 1 January 2005, connected companies were required to account for the loan relationships using an authorised accruals basis of accounting. See CFM81010 for these rules.