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HMRC internal manual

Corporate Finance Manual

Loan relationships: special types of security: funding bonds: how much interest has been paid?

Amount of interest paid by issuing a funding bond

Under CTA09/S413 the amount of interest ‘paid’ by issuing a funding bond is equal to the market value of the bond at the time of issue. If the issuer is a company chargeable to corporation tax, this rule will usually have no practical significance for the presentation of the amount of interest in the company accounts. This is because under the loan relationships regime, companies generally obtain interest debits on an accruals basis, without regard to whether or when it is actually paid. The market value may be relevant where a debtor company’s relief for interest is postponed until payment by the special ‘connected parties’ rule at CTA09/S373 - see CFM35800.

However the value is important when the company completes its CT61 return because if the value agreed with HMRC differs from that originally declared on the CT61 for the relevant quarter then the CT61 will need revising. Any revision of the figures entered into the CT61 for the value of the funding bond may affect the amount of income tax set off payable against income tax borne in the CT61 return and for any set off of income tax against mainstream corporation tax.

Section 957 ITA07 enables an officer of HMRC to issue an assessment if an amount included in a CT61 is incorrect. There is a duty on the issuing company to submit a revised CT61 under section 958/ITA07.

The value of the funding bond also has ramifications for the creditors accepting the funding bonds as payment of the interest. The amount of any interest charged to tax on the recipients of the funding bond will depend on the value of the funding bond at the date of issue. Similarly the amount of any repayment claims made for the tax deducted and paid over to HMRC by funding bond will depend on the value of the funding bond.

The example in CFM37470 explains the position when the valuation of the funding bond by HMRC differs from the value used by the issuing company in its returns.

The office responsible for dealing with the issuing company’s accounts should arrange a valuation of the funding bonds when it receives a copy of the funding bonds and the terms and conditions from the Accounts Office.