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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: late interest: when is interest brought into account?

When have credits been ‘brought into account’ by the creditor

Condition B in CTA09/S373 means that for the creditor to bring into account the full amount of the interest for the purposes of the loan relationships legislation does not mean that the creditor must have paid corporation tax on the whole of the interest. Provided it is chargeable in principle, it does not matter if other kinds of debits, group relief etc mean that no tax is payable.

Equally, the interest will be ‘brought into account’ if the creditor company has recognised an impairment loss in respect of the interest receivable, and that loss is allowed as a loan relationships debit.

This can happen where the creditor and debtor companies are not connected within CTA09/S466 (connection through control), but are connected in one of the other ways summarised at CFM35810 - connection through participation in a close company, major interest or through a pension scheme.

More rarely, it can happen where the debtor and creditor are connected under CTA09/S466 (so that normally the creditor would be denied relief if it regards the interest as wholly or partly irrecoverable), but nevertheless the creditor company is given relief under some special statutory provision.

To the extent that such relief is given for interest, it might be thought that the creditor has not brought that interest ‘into account’ under loan relationships. This is not our view.

We take the view that in a period of account beginning on or after 1 January 2005, the interest is recognised in determining the company’s profit or loss, but as a separate matter the interest debt is reviewed for impairment at the balance sheet date, and any impairment loss is recognised. The examples below illustrate the principle. For earlier periods we take the same view in relation to amounts brought in under an authorised accruals method and separately an authorised arrangement for bad debt has authorised an equivalent debit.

Example 1

X Ltd owns 45% of the shares in XY Ltd, with the other 55% being held by Y Ltd. X Ltd has made a loan to XY Ltd at a commercial rate of interest. XY Ltd defaults on the interest payments and, in its accounting period year ended 31 December 2009, X Ltd recognises an impairment loss in respect of the interest debt.

X Ltd has a major interest in XY Ltd (see CFM35930), but it does not control XY Ltd. The impairment loss is therefore allowable. However, this does not prevent XY Ltd from deducting the interest as it accrues, because X Ltd is still bringing the interest into account under loan relationships. So Condition B in CTA09/S373(3) is not met.

Example 2

In 2005, M Ltd makes a 10-year loan to N Ltd, a company within the same group. In year ended 31 December 2010, the group experiences difficult trading conditions, and N Ltd ceases to pay the interest on the loan. Later in the year, M Ltd is put into administration, and this is ‘insolvent administration’ as defined in CTA09/S323 (3). Even though N Ltd and M Ltd are connected within CTA09/S466, any impairment loss in respect of the interest that accrues to M Ltd while it is in insolvent administration will be allowable, by virtue of CTA09/S357 (CFM35400). Nevertheless, CTA09/S373 will not apply to the interest debits claimed by N Ltd.