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HMRC internal manual

Corporate Finance Manual

Loan relationships: ‘hybrid’ securities with embedded derivatives: anti-avoidance: connected debtors and creditors

Debtor and creditor bring in different debits and credits

For debits and credits arising on or after 12 March 2008, CTA09/S418 (introduced by FA08 as FA96/S94B) counters schemes where a convertible security is held intra-group and the creditor and debtor account for it in such a way that the debtor’s debits are larger than the creditor’s taxable credits. Where the relevant conditions are met the creditor’s credits have to be increased to match the debtor’s debits.

The legislation was amended by FA09/SCH30 in order to counteract disclosed schemes that got round the original legislation. The amendments have effect for credits and debits arising on or after 22 April 2009. Two main changes were made.

  • The amended provision applies to all convertible or exchangeable securities where the holder and the issuer are connected.
  • In certain circumstances, the creditor company may be treated as continuing to be a party to the loan relationship - and be required to bring additional credits into account under CTA09/S418 - even though there has been a disposal of the security.

See CFM37740 for more detailed guidance below on the conditions for CTA09/S418 to apply. CFM37750 deals with the effect of the section.

It should be noted that CTA09/S418 applies a different, and wider, definition of ‘connection’ than that at CTA09/S466 (see CFM37750).