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HMRC internal manual

Corporate Finance Manual

Loan relationships: tax avoidance: unallowable purpose: example

Example of unallowable purpose

A company borrows £50 million from a finance company at arm’s length. The company becomes insolvent and disposes of all its assets. This leaves it with an outstanding debt of £40 million. The company is not liquidated and interest continues to accrue on the debt.

The finance company either does not accrue the interest receivable or it accrues the interest and then writes it off as a bad debt. The company accrues the interest and makes a deficit on which group relief claims are made.

The company has no activity which is within the charge to corporation tax (CTA09/S442(2)). The purpose of the loan relationship is therefore specifically excluded from being a business or commercial purpose and it is an unallowable purpose.

In addition, although the loan relationship was originally bona fide, its continued existence is not commercial. The test of unallowable purpose given by CTA09/S442(1) & (2) is the purpose of the loan relationship in the accounting period. The only purpose of the loan relationship in the current accounting period is to generate group relief, securing a tax advantage for another group company (CTA09/S442(5)).

The debits relating to the loan relationship should be disallowed.