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HMRC internal manual

Corporate Finance Manual

From
HM Revenue & Customs
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Loan relationships: special types of security: deeply discounted securities and connected companies: postponement of debits

DDS and connected companies: effect of CTA09/S407

Where a security falls within CTA09/S407(1) in any accounting period, any debits accrued by the issuer for the discount are disallowed by CTA09/S407(2), and are instead brought in when the security is redeemed.

Example

Biggar plc issues loan notes with a face value of £12,000 to Koko Ltd, its overseas parent resident in a ‘non-qualifying territory’ (CFM37320). The issue price is £10,000 and the notes will redeem in 5 years’ time. Koko Ltd holds the notes to redemption.

Biggar plc’s accounts will show a debit each year for the discount accruing using an economic accruals basis.

As

  • the security is a deeply discounted security
  • the companies are connected (Koko Ltd controls Biggar plc)
  • Koko Ltd, as a non-resident company, does not fall within the loan relationships rules.

the debits for the discount in the accounts of Biggar plc will be excluded in the computation. The whole of the discount will be brought into account in the accounting period in which the notes redeem.

Waiver of postponed discount

If the discount on the securities is waived (for example, because the borrower is struggling), the waiver will be non-taxable on the basis that the discount has not been recognised for tax purposes.

Cessation of connection

Where the conditions of CTA09/S407 are no longer satisfied at any time in an accounting period, perhaps because the connection ceased or the security was sold to an unconnected person, the discount is allowed.

So in the above example, if Koko Ltd sells the notes to an unconnected third party during Year 3, the debits for the discount in the accounts of Biggar plc will be excluded in the computation for Years 1, 2 and 3. The discount excluded in Years 1, 2 and 3 will be brought into account in the AP in which the notes redeem. The discount in Years 4 and 5 is allowed as it accrues. The whole of the discount for Year 3 is disallowed, even though the connection ceased part way through that year.