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HMRC internal manual

Corporate Finance Manual

From
HM Revenue & Customs
Updated
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Loan relationships: connected parties: late interest: major interest

Connection through a major interest

There is a connection under CTA09/S377 where the lender is a company and either

  • the lender has a major interest in the borrower, or
  • the borrower has a major interest in the lender.

The major interest test is designed to ensure that the legislation covers situations where

  • the parties may be able to manipulate mismatches between the taxation of interest paid and received, but
  • one party alone does not control the other party.

This is particularly relevant for joint venture arrangements where, say, two otherwise unconnected companies A and B have 50% interests in a company, C. Neither A nor B alone control C, however A and B could together influence when interest is paid.

The legislation applies only where there is potential for both parties to influence the transactions by looking only at situations where

  • each party has a 40% or more interest in its own right, and
  • both have either debtor or creditor relationships with the company concerned.

(For accounting periods beginning on or after 17 March 2004, there is no longer a requirement for both parties with a major interest in a company to have debtor or creditor relationships with the company for connection to be established.)

Meaning of major interest

CTA09/S473 defines ‘major interest’.

A company (A) has a major interest in another company (B) where

  • A and another person taken together control B, and
  • A and the other person each have at least a 40% interest in B (excluding shares held on trading account), and
  • A and the other person (or companies connected with them) are both debtors or creditors in a loan relationship with B. This last requirement has been removed with effect for accounting periods beginning on or after 17 March 2004.

When looking at control, and whether a company has a 40%+ interest, you include the interests, rights and powers of any company connected with it.

There is an example at CFM35930.