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HMRC internal manual

Corporate Finance Manual

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

The effect of CTA09/S418: example

Companies X and Y are in the same group, but X prepares accounts to 31 December, while Y prepares accounts to 31 March. X issues a convertible security to Y on 1 October 2010.

The relevant accounting period of X (the debtor) is year ended 31 December 2010. Y’s accounting period year ended 31 March 2011 is a ‘corresponding accounting period’. (So is year ended 31 March 2010, but clearly Y’s accounts for this period will not contain any credits or debits in respect of this loan relationship).

The debits brought into account by X in respect of the period 1 October 2010 to 31 December 2010 must, in order to give a just and reasonable result, be compared to the credits arising to Y for the same period. The relevant credits will therefore be those that would be brought into account by Y, using an effective interest rate method, if its period of account began on 1 October 2010 and ended on 31 December 2010.