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HMRC internal manual

Corporate Finance Manual

Loan relationships: connected parties: late interest: APs beginning on or after 1 April 2009: transition to the new rules

Transition to the new rules

A company may elect under FA09/SCH20/PARA(9)(2) for the ‘paid basis’ to apply for the first accounting period beginning on or after 1 April 2009. This provides time for groups to rearrange their inter-company loans if they so wish. The election must be made in the Corporation Tax return for the accounting period in question. No such election can be made for an accounting period ending after 31 March 2011. The election may be revoked by amending the return within normal time limits.

Beyond this no special rules are prescribed for interest accruing but unpaid in accounting periods beginning before 1 April 2009. Debits disallowed under the rule as it stood for accounting periods beginning before 1 April 2009 (or if an election is made, for the first AP for which the changes would otherwise have an effect, the next following AP) will be deductible in accordance with the rules before the amendments took place; that is, when the interest is paid.

In some cases, interest should have been disallowed in earlier periods but may not have been, either because returns were accepted without challenge, or because of the decision set out in Revenue and Customs Brief 33/08 not to pursue points relating to paragraph 2 for currently open periods (see below). The amount allowable in periods after 1 April 2009 is the amount not previously allowed.

Where brought forward unpaid interest relating to periods before 1 April 2009 is paid in periods after that date (including cases where some interest for the earlier periods has been deducted and some has not), any reasonable apportionment of the interest paid between current and earlier periods will be accepted.

Revenue and Customs Brief 33/08

RCB33/08 issued in July 2008 announced that HMRC would not seek to apply paragraph 2(1A) Schedule 9 FA 1996 as it then stood, in corporation tax returns for accounting periods submitted on or after the date of RCB33/08, or open at that date. RCB 33/08 was a temporary measure to enable returns to be settled pending consultation over a permanent legislative change, and applies only for accounting periods beginning before 1 April 2009 when the amendments to the late interest rule came into force.