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HMRC internal manual

Corporate Finance Manual

Loan relationships: tax avoidance: forex: non-arm’s length transactions: non arm's length creditor relationships: meaning of ‘corresponding debtor relationship’

Outward loan: does CTA09/S449 apply?

CTA09/S450 explains what is meant by the ‘corresponding debtor relationship’. Where a company has made a loan that either would not have been made at all at arm’s length, or would have been made in a lower amount, none of the exchange gains and losses is disregarded if

  • corresponding exchange losses and gains fall to be brought into account, as loan relationship debits or credits, by the company which has borrowed the money, and
  • those debits or credits are equal in amount to the credits and debits arising from exchange gains and losses on the creditor loan relationship.

For this purpose, exchange gains and losses are brought into account even where CTA09/PT5/CH3 (CFM33010) ensures that they are not taxed or relieved immediately because they have been taken to reserves and matched with losses or gains on an asset (see CFM62000), or because the debtor and creditor companies do not have coterminous accounting periods

This includes the case where matching takes place under regulations made under the Disregard Regulations (see CFM57000).

So in many cases, CTA09/S449 will not apply. In effect, exchange differences on loans between UK companies will not normally be disregarded.

Example where S449 applies: UK debtor outside the charge to corporation tax

The Tarrant Society is a non-charitable society set up to promote international understanding. It is an unincorporated association and is therefore taxed as a company; however, that portion of its activities relating to receiving subscriptions from members and providing services to members is a mutual business which is outside the CT charge. It has a wholly owned subsidiary, Tarrant (Trading) Ltd, which organises conferences and publishes a journal, for the benefit of both members and non-members.

In its accounting period to 31 December 2005, Tarrant (Trading) Ltd makes a loan of €200,000 to its parent society to subsidise the provision of member services. It is agreed that if the parties had been dealing at arm’s length, no such loan would have been made. An exchange loss of £10,000 arises on the loan during the period.

The Tarrant Society brings no corresponding exchange gain into account. The Society has entered into the loan relationship for the purposes of its mutual business. This is an unallowable purpose, and both credits and debits in respect of exchange differences on the loan are left out of account under CTA09/S441 (CFM38100). Thus under CTA09/S449 the exchange loss arising to Tarrant (Trading) Ltd is left out of account. Equally, an exchange gain on the loan (with a corresponding loss arising to the Society) would be disregarded.