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HMRC internal manual

Corporate Finance Manual

Deemed loan relationships: disguised interest: returns split between more than one party


Returns split between more than one party

In the absence of any rule to deal with this situation, it would be possible for companies to make arrangements that bypass the disguised interest legislation by splitting the return between two or more companies.

If a return is split between two or more companies, the return that is obtained by any individual company might not be ‘economically equivalent to interest’ in the hands of each company. However, there would be a return ‘economically equivalent to interest’ when the position of all recipients of the interest-like return is combined.

Such arrangements would be most likely to be seen in group situations, although it is not exclusive to groups.


Company A enters into an arrangement that will provide a return of £5m from an investment in shares in Company Z of £100m over 365 days. The interest rate of 5% is considered to be reasonably comparable to a commercial rate of interest and the return would fall within the disguised interest rules. However, Company A arranges for that £5m return to be split between itself and its group member Company B, with Company A receiving £2m and Company B receiving £3m.

Neither Company A nor Company B has a return that is reasonable comparable to a commercial rate of interest. For A the return is just 2% and for B there is no interest rate as there is no amount of money on which B’s return is based.

Consequently, in the absence of special rules, both Company A and Company B would escape from the disguised interest rules even though, as a group, there is a return that is economically equivalent to interest from the investment.

Where a return is split between two or more parties, the rule at CTA09/S486

B(6) will ensure that the return does not escape the disguised interest rules for any of the parties.

It achieves this by identifying returns where two or more persons are party to the arrangement and there is a return that is economically equivalent to interest when those persons are taken together but there is not a return economically equivalent to interest for any of the parties is viewed individually.

Where that is the case, the overall return should be split between the parties on a just and reasonable basis.

So, in the above example, the combined return of £5m on an investment of £100m would result in a return economically equivalent to interest. A just and reasonable basis for apportioning that return may be for the full £5m to be brought into account in Company A reflecting the fact that Company A has made 100% of the investment that gave rise to the return (although, of course, the facts in each case would need to be taken into account).