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HMRC internal manual

Corporate Finance Manual

Loan relationships: connected parties: late interest: APs beginning on or after 1 April 2009

Changes to the late interest rule after 1 April 2009

Schedule 20 Finance Act 2009 amended the late interest rule for accounting periods beginning on or after 1 April 2009. It inserted new conditions at CTA09/S374(1A), CTA09/S375(4A), and CTA09/S377(2), applying respectively to cases where the creditor is a ‘connected company’ (CFM35860), a close company participator (CFM35870) or a ‘major interest’ company (CFM35920).

In each case the new condition is that the late interest rule will only apply where the creditor is a company that is ‘resident’ in a ‘non-qualifying territory’.

‘Non-qualifying territory’ takes its meaning from TIOPA2010/S173, and is explained at INTM412090. It means any territory that is not a ‘qualifying territory’, which in turns means a territory with which the UK has a double taxation treaty that contains a non-discrimination article. The list of such territories at INTM412090 includes all EU countries and the majority of other normal tax jurisdictions. It excludes tax havens and similar jurisdictions. If a territory is not on this list, HMRC’s view is that a creditor company is located in a ‘non-qualifying’ territory for the purposes of the late interest rule.

Resident is defined as ‘liable to tax by reason of domicile, residence, or place of management, or effectively managed in a non-qualifying territory other than one in which companies are liable to tax by reason of domicile, residence or place of management’.

Some territories do not levy tax by reason of domicile, residence or place of management, and a company effectively managed in such a territory would not be ‘resident for tax purposes’ in such a territory. The words ‘effectively managed’ are broadly equivalent to the concept of ‘place of management’ used in Double Taxation Treaties. A company will therefore be caught by the late interest rule even if its creditor is managed in a jurisdiction that does not levy an income tax or corporation tax on profits, or one that only taxes local-source income, and would not otherwise be ‘resident’ there for tax purposes.

The changes made by FA09 mean that in the majority of cases where the creditor is a company, unless that company is located in a tax haven, normal loan relationships principles will apply, and interest will be deductible as it accrues in the accounts, not when it is paid. The changes have no effect where the creditor is an individual or a pension scheme.

Equivalent changes were made to the similar rule that applies to deeply discounted securities (CFM37200).

The Budget 2009 announcement on the amendment to the rule stated that if the changes to these provisions were abused, anti-avoidance measures would be introduced in a future Finance Bill. HMRC staff should report examples of avoidance to CTIAA (Financial Products Team).