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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Loan relationships: special types of security: deeply discounted securities: connected and close companies: APs beginning on or after 1 April 2009

Changes to the rules on deeply discounted securities after 1 April 2009

Schedule 20 Finance Act 2009 amended the rules on the postponement of debits for discounts on securities issued by connected and close companies, for accounting periods beginning on or after 1 April 2009. It inserted new conditions at CTA09/S407(1A) and CTA09/S409(1), applying respectively to cases where the securities are issued by a ‘connected company’ (CFM37230), and by a close company to a participator (CFM37260).

In each case the new condition is that the postponement of a debit for discounted accruing will only apply where the creditor is a company that is ‘resident’ in a ‘non-qualifying territory’.

For further details on the definitions of ‘non-qualifying territory’ and ‘resident’, and on the transitional arrangements, see the explanation of the FA09 changes at CFM35960 to CFM35980.

As with the changes to the late interest rule (CFM35800), the amendment to the rules on the postponement of discount debits 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 discount will be deductible as it accrues in the accounts, not on redemption of the security. The changes have no effect where the creditor is an individual.

Note also that the ‘practical approach’ described in CFM35980 which applies where a UK company obtains funding from a multi-investor fund is equally relevant to cases where the debtor company holds a deeply discounted security.