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HMRC internal manual

Corporate Finance Manual

From
HM Revenue & Customs
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Loan relationships: connected parties: late interest: when is interest paid?

When is interest paid?

Condition A in CTA09/S373 is that interest is not paid within 12 months following the end of the accounting period in which it accrues in the accounts. You therefore have to establish when the interest is paid. This is not always as straightforward as might be imagined.

Book entry

A company can pay interest by a book entry, rather than handing over cash. A book entry only constitutes payment if

  • the paying company has enough funds available, and
  • the recipient is free to draw on those funds unconditionally.

This situation was discussed in Minsham Properties v Price (63TC570).

This is similar to a bank crediting interest to your ordinary deposit account. Although no cash changes hands, the bank has paid it and you have received it, as you are free to withdraw the funds at any time.

Example

Huron Inc lends £500,000 to Bond Ltd, its UK subsidiary. Bond Ltd is profitable, but on the due date for the interest payment, the interest is credited to the inter-company account rather than being paid in cash.

If Bond Ltd has sufficient funds available, and Huron Inc is able to demand a cash payment at any time, it might be accepted that interest has been paid and received for tax purposes. The money is fully at the disposal of Huron Inc just as if it had been paid into an account at a bank.

Additional loan to cover interest

The lender may make a separate loan to the borrower so that the borrower can pay the interest due. This situation was covered in the case of Macniven v Westmoreland Investments Ltd (73TC1).