Loan relationships: special types of security: funding bonds: when HMRC will satisfy a repayment claim using money
Making repayments in money after Finance Act 2008
If the funding bond was issued before the 12 March 2008 then the creditor can decide whether or not to accept the funding bond used to pay the tax deducted in satisfaction of their repayment claim. If the creditor decides not to accept the funding bond in satisfaction then the repayment claim will be satisfied using money.
There will also be rare circumstances where funding bonds are issued on or after 12 March 2008 where a money repayment will be made rather than satisfying the repayment claim using the funding bond. This is where it would be impracticable for the bond issuer to divide the funding bond so that HMRC can make the repayment. The meaning of ‘impracticable’ is discussed at CFM37430.
Section 413/CTA09 requires that the issue of a funding bond is treated for all the purpose of the corporation tax acts as if it were the payment of an amount of interest equal to the value of the bonds at the time of their issue.
See below for an example of the importance of establishing the value of the funding bond at issue.
Debtor Company issued funding bonds in December 2007 to pay yearly interest due on 31 December 2007 of £1million. The face value of the funding bonds issued was similarly £1million. The majority of the creditors were UK companies and payments of interest between UK companies can be made without deduction of tax and so Debtor Company only had to deduct tax from £150,000 of the interest paid. To meet this requirement Debtor Company retained funding bonds with a face value of £30,000 (20% of £150,000) and tendered them to HMRC as payment of the tax deducted with their quarterly CT61 return.
The office dealing with the Debtor Company’s corporation tax arranged for the funding bond issue to be valued by Shares and Valuation, who advised that the value of the funding bonds at the time of issue was not the face value of £1million but was in fact £800,000. It is this value that is used for the purposes of corporation tax and any repayment claims. Because the valuation differs from the face value of the funding bonds the value of the funding bonds paid over to HMRC is similarly adjusted for tax purposes to £24,000 [(£800,000/£1million) x £30,000]. The value of £24,000 is the amount that should be included by the Debtor Company in a revised CT61 for the quarter to 31 December 2007.
Creditor Company S.A. is one of the recipients of funding bonds from which tax was deducted and is entitled to reclaim the tax deducted. Creditor Company S.A. was entitled to receive funding bonds with a gross face value of £100,000, from which funding bonds with a face value of £20,000 were retained by the Debtor Company for the tax deducted and paid over to HMRC. The value of the £20,000 funding bonds at the time of issue is £16,000 [£800,000/£1million) x £20,000]. Creditor Company S.A. is not willing to accept the funding bonds retained in satisfaction of its repayment claim and requests a money payment. HMRC repays to Creditor Company S.A. money of £16,000 - the value of the funding bonds at the time of issue and not the face value of the funding bonds. HMRC continues to hold the funding bonds with a face value of £20,000 until redemption when payment is requested from the Debtor Company.