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HMRC internal manual

Corporate Finance Manual

Loan relationships: tax avoidance: unallowable purpose: transactions not normally within ‘unallowable purposes’

When CTA09/SS441-442 will not normally apply

S441-442 will not normally apply to loan relationship debits:

  • simply because a company is able to obtain relief for the same expenditure or loss on the borrowing to which the debits relate in more than one jurisdiction. However, S441-442 would apply where the structure that has been adopted has one or more non-commercial features (so that the loan relationship can be said to have an unallowable purpose) and/or where, taking account of the overall position of the company or group, relief for interest and other finance costs might otherwise be available more than once in the UK in respect of the true economic costs of the borrowing;
  • that relate to a borrowing from an exempt body (such as a pension fund), even if that exempt body is connected with the borrower, provided the arrangements are commercial;
  • that relate to a straightforward borrowing by a UK plc in order to fund a repurchase of its shares provided that there are no attempts to structure the arrangement in such a way as to provide a tax advantage for any other person and/or the amount borrowed (the level of gearing up) is dictated by market forces and hence is at arm’s length;
  • that relate to a third party borrowing undertaken by one group member, that fulfils the commercial borrowing requirements of the group, which it on-lends interest-free (or at a rate not exceeding the costs of the third party borrowing) to other UK-resident group members. In such circumstances, S441-442 would not apply, provided that the group gets one and only one deduction in the UK for the costs associated with the true economic cost of the borrowing. For example, S441-442 will not normally apply where intra-group interest-free loans are made primarily to enable borrowings to be matched with assets within the meaning of CTA09/S317; or
  • where a loan relationship debit in one group company is matched by an equal and opposite loan relationship credit, which is fully taxed, in another group company for the same loan relationship and the funding is not then utilised to secure a tax advantage. On the other hand, S441-442 are potentially in point if the main or one of the main purposes of the intra-group funding is to achieve a tax advantage for the group as a whole, in that the loan relationship credit on the intra- group funding is in some way shielded from tax. An example of the loan relationship credit being shielded would be the soaking up of otherwise stranded surplus expenses of management etc. Where the loan relationships involve cross-border transactions, thin capitalisation and transfer pricing legislation as well as the provisions of the Double Taxation Treaties may be applicable.