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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: lenders outside the loan relationships rules

When is a lender not fully within loan relationships?

Where the lender’s interest is fully within CTA09/PT5 there is less risk of mismatch. The lender accounts for interest receivable as it accrues, even if it does not receive it until after the end of the AP. This is why CTA09/PT5/CH8 only applies if the lender is not within the loan relationships rules or, although within the regime for part of the period, credits representing the full amount of the interest are not brought into account at any point for taxation of loan relationship purposes.

Non-corporates

Individuals are not within the loan relationships rules, and the late interest rule may apply where the lender is an individual, or partnership of individuals.

If the lender is a partnership, the borrower will need to determine whether all the interest will be taken into account within the loan relationships rules. Where a partner is non-resident, or non-corporate, the late interest rule may apply to the extent of that partner’s share of the partnership profits. For more information on the taxation of partnerships, see CFM36000.

Overseas companies

The loan relationships rules do not apply to all non-resident companies, so if the lender is a foreign company CTA09/PT5/CH8 may apply. The late interest rule will also apply where a creditor company changes its residence part way through an accrual period, in relation to interest accruing after the change.

The loan relationships rules do apply to loans made by the UK branch of a non-resident company where the loan is held for the purposes of the UK branch. In these circumstances the late interest rule will not apply.

Accounting periods beginning on or after 1 April 2009

Note, however, that with effect from accounting periods beginning on or after 1 April 2009, the late interest rule only applies in cases where the creditor is a company if that company is resident in a ‘non-qualifying territory’. In effect this means that in the majority of cases, where interest is payable to a company, the debtor company will receive the normal ‘accruals basis’ loan relationships deduction, unless the creditor company is located in a tax haven. CFM35960 has more details.