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HMRC internal manual

Corporate Finance Manual

Loan relationships: connected parties: late interest: APs beginning on or after 1 April 2009: multi-investor partnerships

Multi-investor partnerships

Where a UK company obtains funding from a multi-investor fund, which may typically be structured as a limited partnership with both corporate and non-corporate investors, from a number of different countries, and which may on-lend to the UK company via a non-UK intermediary company, it may be difficult for the UK company to decide whether the late interest rule applies to it.

Company partner is a connected company or a major interest company

The UK debtor company may be connected (within the meaning of CTA09/S374) with a company partner in the partnership, in which case the late interest rule will apply if that corporate investor is located in a non-qualifying territory. ‘Look through’ rules (CTA09/S467) ensure that company partner remains connected where the lending is undertaken via a partnership. The same principle applies for the ‘major interest’ test (CTA09/S377) (CFM35930) by virtue of CTA09/S474.

Company partner is a participator

The late interest rule will apply where the creditor is a corporate partner that is a close company participator or otherwise within CTA09/S375, and is located in a non-qualifying territory. The same ‘look through’ principle applies where the partnership is a ‘transparent entity’ to ensure that the participator is the person standing in the position of creditor.

CTA09/S379 ensures that the company partner will be caught by S375 where the lending is made indirectly, via a series of loan relationships. This will apply in ‘back to back’ or conduit arrangements (see CFM35160), where the lending is done via a non-UK intermediary company.

However, the non-UK company may on-lend the funds from the partnership on different terms to the UK company. The debt from the fund to the non-UK company will be different (legally and economically) to the debt from the non-UK company to the UK company. There will be no indirect loan relationship and CTA09/S375 will not apply (outside of ‘Ramsay’ type issues, or where under IAS39 HMRC might challenge whether the asset and liability in the non-UK company are so closely linked that derecognition (CFM21760) might be appropriate).

Practical approach

There may be cases where it is impractical for the UK company to establish whether interest should be deductible on the ‘paid’ or ‘accruals’ basis, and in what proportion, for example where the investor group is very large, or the profit share agreement very complex. In such cases, HMRC will accept the partnership rather than the partners as ‘standing in the position of loan creditor’ for the purposes of CTA09/S375(4A), with the result that the late interest rule will not be disapplied. A ‘paid basis’ will then apply to interest paid by the debtor. It remains open to the company to apply the accruals basis to the extent that it is able to establish that its creditor companies are not resident in non-qualifying territories.

This treatment of the partnership as standing in the position of creditor is a pragmatic approach which applies only for the purposes of enabling the debtor company to decide if the late interest rule in CTA09/S375 applies to it, where for example large and complex investor structures give rise to practical difficulties. It has no bearing on the determination of the loan relationships credits and debits of company partners under CTA09/PT5/CH9 (CFM36000).