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HMRC internal manual

Corporate Finance Manual

Loan relationships: connected parties: late interest: overview


Under normal loan relationships rules, interest is relieved when it accrues, not when it is paid.

This could lead to a mismatch if the borrower gets relief when the interest accrues, the interest is not paid for some time, and the lender, not being within the loan relationships rules, is taxed on the interest only when it is received, or is outside the UK tax net entirely.

Connected parties could arrange their affairs to take advantage of this mismatch. For this reason CTA09/PT5/CH8 postpones relief for the borrower, in certain circumstances, when interest is paid late.

CTA09/S373 applies this rule in four cases, where two conditions are met.

The four cases are where interest is payable by a debtor company where

  • The debtor company and the creditor company are connected companies (CTA09/S374)
  • The creditor is a close company participator (CTA09/S375)
  • The debtor and creditor companies have a major interest in each other
  • The creditor is an occupational pension scheme.

The two conditions are that

  • the interest is not paid within 12 months of the end of the accounting period in which it accrues (CFM35830 explains what we mean by ‘paid’), and
  • credits representing the full amount of the interest are not brought into account under the loan relationships rules for any accounting period (CFM35840 explains what we mean by ‘brought into account’).

In such cases, the borrower can only bring the debit into account when it actually pays the interest.

Lenders outside loan relationships

Broadly speaking the late interest rule applies where the lender is outside the loan relationships rules. Note, however, that for accounting periods beginning on or after 1 April 2009, there is a significant change to the scope of the rule on late-paid interest as it affects cases where the creditor is a company. See CFM35850.

Amounts disallowed subsequently written off

CTA09/S373 assumes that interest subject to the provisions of CTA09/PT5/CH8 does not accrue until it is paid. This treatment overrides the actual debits or credits in the accounts. Applying this assumption, if amounts disallowed under these provisions are subsequently written off (as they may be, for example in a debt/equity swap - see CFM33200) there are no debits relating to that interest to reverse and no loan relationship credits arise.