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HMRC internal manual

Corporate Finance Manual

Loan relationships: tax avoidance: no debits for derecognition

No debits for derecognition

CTA09/S311 addresses the case where, in accordance with generally accepted accounting practice, amounts are not fully recognised in the accounts. In such circumstances the cash flows on a creditor relationship (a loan relationship asset) will not be recognised in accounts and may escape taxation under the loan relationships rules.

An act of derecognition may also give rise to a debit in one of the accounting statements in CTA09/S308 - the profit and loss account or income statement, statement of total recognised gains and losses, statement of changes in equity, or any other statement of items taken into account in computing the company’s profits and losses (see CFM33100). In some instances the act of derecognition may result in an amount being debited in the company’s balance sheet.

CTA09/S455A denies a deduction for such a debit where the company is party to tax avoidance arrangements and continues to be party to the derivative contract after its derecognition.

‘Tax avoidance arrangements’ means the same as it means in CTA09/S311 (CFM39220). It does not matter whether the amount in respect of the derecognition arises in the profit or loss account or elsewhere in the accounts, or is claimed as a computational deduction (for example, under CTA09/S320 or under CTA09/S316 if a loan is derecognised under a change of accounting policy).

Section 455A applies only where the company continues to be party to the loan relationship immediately after the act of derecognition. It will not, therefore, apply to derecognition that follows from an actual disposal of the asset by the company.


ABC Ltd is party to a valuable loan asset. It enters into a subscription agreement to acquire shares in XYZ Ltd, so that its loan asset is derecognised and replaced by another financial asset. The accounting entries are a credit in the loan asset account (which eliminates it from the balance sheet), and a debit creating the new asset. This debit is claimed as a deduction under CTA09/S320. CTA09/S455A denies a tax deduction for the purposes of the loan relationship rules in respect of an amount derecognised, where the company is party to tax avoidance arrangements.

This guidance applies for accounting periods beginning on or after 6 December 2010. For periods before that date, refer to CFM33120 and CFM33122