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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Deemed loan relationships: alternative finance: types of arrangement

The types of alternative finance arrangement

Legislation on alternative finance arrangements for the purposes of income tax and corporation tax was first introduced in Chapter 5 Part 2 Finance Act 2005. The rules were extended in FA 2006 and FA 2007.

The legislation that applies now for corporation tax purposes was rewritten in the Corporation Tax Act 2009 in CTA09/PT6/CH6. The legislation that applies for income tax purposes is at ITA07/Part 10A.

The alternative finance tax rules cater for five types of alternative finance arrangement.

A purchase and resale arrangement and diminishing shared ownership arrangement can be used, for example, as an alternative to borrowing using a conventional loan or mortgage.

The deposit arrangement and profit share agency arrangement are similar to a conventional bank deposit account.

Alternative finance investment bonds are economically equivalent to a marketable security issued by banks, companies or governments to raise finance, and held by financial institutions, pension funds or other corporate or non-corporate investors. Unlike the other alternative finance arrangements to which the legislation applies, they are intended to be traded in recognised markets.

CFM11130 has more on particular types of Shari’a compliant financial contract. The terms used in the alternative finance rules correspond to these contracts as shown in the following table. Note, however, that the contract must meet the specific conditions set out for each arrangement if it is to fall within the rules in CTA09/PT6/CH6.

Purchase and resale Murabaha
Diminishing shared ownership Musharaka
Deposit Mudaraba
Profit share agency Wakala
Investment bond Sukuk

Commencement dates

FA 2005: the legislation applies to purchase and resale arrangements, and deposit arrangements entered into on or after the 6 April 2005. Transitional rules apply to deposit arrangements in existence prior to 6 April 2005.

FA 2006: the legislation applies to diminishing shared ownership arrangements and profit share agency arrangements entered into on or after 6April 2006 for Income Tax purposes and 1 April 2006 for Corporation Tax purposes. Transitional rules apply to profit share agency arrangements in place prior to these dates.

FA 2007: the provisions relating to alternative finance investment bonds apply for CT purposes to arrangements entered into on or after 1 April 2007. Transitional arrangements apply to alternative finance investment bonds that were in existence both before and after 1 April 2007.

See CFM44270 for more on commencement provisions for income tax and capital gains tax.