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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Loan relationships: tax avoidance: transactions not at arm’s length: introduction

Adjustment

CTA09/S444 deals with transactions not at arm’s length.

Where a related transaction - that is, any disposal or acquisition of a loan relationship in whole or in part (CFM31120) is not an arm’s length transaction, then any debits or credits brought into account are ignored for tax purposes. Instead, the company should calculate the credits and debits as though the transaction had been carried out at arm’s length.

These adjustments cover

  • debits and credits arising directly from the related transaction itself
  • all future debits and credits.

S444 generally applies to both parties to a loan relationship, if they are within the loan relationship rules.

Example

Inghole Inc subscribes for a security on the open market for £5m, which will be redeemed at face value in 5 years. In Year 3, when the value of the security is £5.5m, it sells it to Jabadaw Ltd for £6m. The companies are members of the same group but Inghole Inc is not within the charge to CT.

The transaction is not at arm’s length so CTA09/S444 applies.

Jabadaw, in its accounts, will accrue the debits for the market premium of £1m (the difference between the purchase price £6m and the redemption value of £5m). However, because this is not an arm’s length transaction, these debits are ignored for tax purposes. Instead, Jabadaw Ltd must adjust its accounting profits or losses to the amount they would have been had it acquired the security for the arm’s length price, £5.5m. Jabadaw will therefore accrue the arm’s length premium - £0.5m, the difference between the market value £5.5m and the redemption price £5m