CFM38440 - Loan relationships: tax avoidance: transactions not at arm’s length: bringing into account transfer pricing adjustments

CTA09/S446

The transfer pricing rules apply to loan relationships as they apply to any other form of ‘provision’ between associated persons – although there is an important exception for exchange gains or losses on derivative contracts (see CFM56060).

It should be noted that the transfer pricing rules have priority over the market value rule at CTA09/S444 (see CFM38420) and can apply to the original terms of a loan relationship as well as to the acquisition or disposal of loan relationships.

Transfer pricing provisions

In broad terms, the transfer pricing rules at TIOPA/PT4 apply where:

  • there is a provision (the actual provision) between associated persons,
  • the provision differs from the provision which would have been made at arm’s length (the arm’s length provision), and
  • the actual provision confers a potential UK tax advantage to one of the affected persons.

Where the conditions are met, the profits and losses of the potentially advantaged person should be calculated for tax purposes as if the arm’s length provision had been made instead of the actual provision.

Note that there are certain exemptions for small and medium enterprises.

See INTM412000 for further details of the transfer pricing rules.

In considering whether the transfer pricing rules apply to particular arrangements involving loan relationships, you should look at the general guidance on Part 4 in INTM410000 onwards, and the practical advice at INTM480000 onwards.

Application to loan relationships

S446 sets out how transfer pricing adjustments are taken into account for the purposes of the loan relationships legislation. In particular, this ensures that any profit or loss on a loan relationship arising as a result of the application of the transfer pricing rules (including any adjustment to charges or expenses in connection with the contract) is treated as a credit or debit under CTA09/PT5, and all of the rules for computing or bringing into account credits or debits on loan relationships will apply to such amounts.

S446 achieves this by bringing the adjusted amounts into account for the purpose of the loan relationship legislation to the same extent as would be in the case for the actual amount of each credit and debit.

CFM38450 explains the interaction of the transfer pricing rules with other loan relationship provisions.