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HMRC internal manual

Corporate Finance Manual

Loan relationships: tax avoidance: unallowable purpose: transactions normally within ‘unallowable purposes’

When CTA09/SS441-442 will normally apply

SS441-442 would normally apply to loan relationship debits:

  • which, subject to the comments at CFM38180 (fourth and fifth bullets), relate to the write-off of loans where the purpose of the loans was not amongst the business or other commercial purposes of a company. An example of a loan of this nature would be an interest-free loan made by a company, whose business consists in operating a widgets retail outlet, which had lent the money to a football club supported by one of the directors of the company for the purpose of providing financial support to the football club. Furthermore, if the company borrowed to make the loan to the football club, then SS441-442 would normally also apply to disallow the loan relationship debits relating to the interest or other finance costs on that borrowing. If, however, the purpose of the loan included a commercial or other business purpose such as advertising, then this would be taken into account in arriving at the amount attributable to the unallowable purpose on a just and reasonable basis (S441(1)-(3));
  • which, subject to the comments at CFM38180 (fourth and fifth bullets), relate to a borrowing the proceeds of which are used in such a way that the company cannot or does not expect to make an overall pre-tax profit. An example would be where a company borrows at interest and on- lends at a rate of interest that is less than the rate of interest on the borrowings; or
  • where a company or a group of companies enters into one or more transactions or arrangements which have the main purpose or one of the main purposes of securing loan relationship debits for repayments of loan principal, in addition to payments of interest, on the true economic commercial borrowing to the company or group. An example of this would be where one group company undertakes a borrowing of £20 million at 8.4% for 5 years from a third party and at the same time a second group company pays that third party £13 million for preference shares of £20 million in the first group company to be delivered 5 years later. The effect of this is that, economically, the group borrows £7 million on an amortising basis at 8.4% but for tax purposes the group claims relief as loan relationship debits for both the interest of £1.4 million on the group amortised borrowing of £7 million and the repayment of the £7 million loan principal. In such circumstances SS429-430 are likely to apply to disallow the amounts equivalent to repayments of principal.