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HMRC internal manual

Corporate Finance Manual

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

The effect of CTA09/S418

Effect of meeting the conditions

Where all of the relevant conditions have been met CTA09/S418 has the following effect:

  • The creditor company must bring into account additional credits equal to the excess of the amounts of the debits that the issuer brings in over the amount of credits that the holder would otherwise bring in, and

A company’s ability to make an election to treat its loan relationships as divided in accordance with CTA09/S416 is disapplied (CFM37720). This takes effect with respect to all elections made on or after 12 March 2008.

Disposal of loan relationship by creditor company

Some disclosed schemes attempted to negate the effect of CTA09/S418 by putting the creditor company beyond the reach of the legislation. Legislation to counter such arrangements was introduced by FA09, applying to credits or debits arising on or after 22 April 2009.

  • CTA09/S418(6A) applies specifically where the creditor disposes of the convertible or exchangeable security under a repo or stock lending arrangement, or under a transaction treated under TCGA92/S26 as not involving a disposal. (TCGA92/S26 deals with assets transferred by way of security - see CG34460).
  • CTA09/S418(6B) applies to any disposal of the creditor loan relationship to another person, but only where the disposal is made with the ‘relevant avoidance intention’ - defined as the intention of eliminating or reducing loan relationships credits to be brought into account.

In both of these cases, the effect of the provision is that the original creditor company is treated as continuing to be party to the loan relationship. This means that

  • for the purposes of CTA09/S418(3) (see CFM37730), the debits brought into account by the debtor in an accounting period are compared to the credits deemed to be brought into account by the creditor, on the assumption that it remains a party to the relationship, and
  • where, as a result, additional credits arise under CTA09/S418(5), they are taxed on the original creditor.

Connection for the purposes of CTA09/S418

For the purposes of this section the definition of connection is that of CTA10/S1122 but also provides that there is a connection if both companies reflect their accounting results in the same consolidated group accounts of the same group of companies.

Two companies are still treated as connected even if an intermediate company stands in between the two companies. This is similar to the principle of ‘indirect loan relationships’ as part of the general test for connection at CTA09/S348(3) (see CFM35160).

Non coterminous accounting periods

CTA09/S418 applies to an accounting period of the debtor company. An accounting period of the creditor company corresponds to that period if it either coincides with it, or is wholly or partly within it. Where accounting periods do not coincide, just and reasonable apportionments are to be made for the purpose of applying the provision.