Beta This part of GOV.UK is being rebuilt – find out what this means

HMRC internal manual

Corporate Finance Manual

From
HM Revenue & Customs
Updated
, see all updates

Loan relationships: special types of security: deeply discounted securities and connected companies: conditions

DDS and connected companies: conditions

CTA09/S406 to S408 apply where, for any accounting period

  • the company issues a deeply discounted security (CFM37220);
  • another company stands in the position of creditor as respects that security;
  • there is a connection between the issuing company and that other company (CFM37240);
  • the security is not redeemed in that accounting period;
  • the creditor company does not bring in credits for the discount under the loan relationship rules.

Credits not brought in by the creditor company

CTA09/S407(1)(e) refers to credits not brought in for any accounting period ‘for the purposes of this Part’. This means not brought in under the loan relationships legislation, so CTA09/S407 potentially applies where a creditor company is not within the charge to CT at all, such as a non-UK resident company.

For accounting periods beginning on or after 1 April 2009, the rules apply in cases where the creditor is a company only if the creditor is resident in a ‘non-qualifying territory’. See CFM37320.

Credits are considered to be ‘brought into account’ where a creditor company, despite being connected, is able to get impairment relief under the loan relationships legislation. See CFM35350, which applies to discount as it does for interest.

Persons standing indirectly in the position of creditor

CTA09/S412 applies the rules where the creditor holds securities indirectly, through a series of loan relationships or money debts.

Example 1

LK Ltd issues a security for £30,000 to YT Bank Ltd, an unconnected UK company. The security will redeem for £40,000 in 3 years. YT Bank Ltd then issues a security for the same amount, with an identical return, to HG SA Ltd, a non-resident subsidiary of LK Ltd.

CTA09/S412 treats HG SA Ltd as the creditor for the security issued by LK Ltd, because it indirectly stands in that position.

Example 2

Same facts as above except that YT Bank Ltd borrows £40,000 from HG SA Ltd, a non-resident subsidiary of LK Ltd, without a security being issued.

HGSA Ltd is treated as the creditor for the money owed to YT Bank Ltd by LK Ltd, because it indirectly stands in that position.