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HMRC internal manual

Corporate Finance Manual

Loan relationships: connected companies: example of change of accounting basis

Change of accounting basis on becoming connected: example

H plc is the holding company of a trading group. It grants a franchise to a US company to trade under the ‘H’ name, and also holds interest-bearing loan notes issued by the US company. The notes, with a face value of $2 million, were issued at a discount. H plc accounts for the notes as an available for sale asset.

In year ended 31 December 2007, H plc acquires 90% of the shares in the US company, and therefore becomes connected.

The value of the loan notes at 31 December 2006 and 31 December 2007 is as follows:

  Carrying value - amortised cost basis Exchange rate (£/$) Amortised cost basis - sterling equivalent Fair value
31 Dec 2006 $1,900,000 1.7000 £1,117,647 £1,130,000
31 Dec 2007 $1,950,000 1.7200 £1,133,720 £1,140,000

At 31 December 2006, the closing fair value is £1,130,000 - this is amount FVA under CTA09/S350. The opening value on an amortised cost basis (ACA) in the period during which the connection starts is £1,117,647. The difference between these, £12,353, is brought in as a loan relationships debit in the year ended 31 December 2007.

The tax computations for year ended 31 December 2007 will be on an amortised cost basis. They will show a credit of £16,073 (£1,133,720 - £1,117,647). The taxable amount, net of the S350 debit, is therefore £3,720 (plus interest credits).