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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Deemed loan relationships: alternative finance: purchase and resale arrangements: tax treatment

Purchase and resale arrangement: tax treatment

CTA09/S511 sets out how the alternative finance return in a purchase and resale arrangement is calculated.

If the total consideration for the asset is paid in one lump sum then the alternative finance return equals the amount by which the sale price (paid by the second purchaser) exceeds the purchase price paid by the first purchaser.

If the asset is paid for in instalments then each instalment is taken to include an alternative finance return, which is equal to the appropriate amount.

The appropriate amount for each instalment is the amount equal to the interest that would have been included in the instalment if:

  • interest had been payable on a loan by the first purchaser of the asset to the second purchaser, equal to the amount paid by the first purchaser for the asset;
  • the interest payable on the loan had been equal the excess of the amount paid by the second purchaser over the amount paid by the first purchaser; and
  • the instalment was a part payment of the principal and interest that would have been payable on such a loan; and
  • the loan was on arm’s length terms and accounted for under GAAP.

In effect the second purchaser of the asset has to calculate the alternative finance return included in each instalment as if it had taken out a conventional loan for the purchase price paid by the first purchaser of the asset. The appropriate amount represents the interest in each loan instalment that would have been payable on such a conventional loan.

Example of a purchase and resale arrangement

S Ltd wants to obtain finance of £100,000 to buy extra stock. It takes out an alternative finance arrangement through M Bank. M Bank sells S Ltd £100,000 worth of copper for £112,400 payable in equal monthly instalments over two years. S Ltd immediately sells the copper on the London Metals Exchange for £100,000 and so obtains the finance. The purchase and resale arrangement is on arm’s length terms.

The alternative finance return is equal to the appropriate amount. As the purchase and resale arrangement is on arms length terms, it is reasonable to assume that the hypothetical loan would be on the same terms. The interest that would have been payable is assumed to the excess of the S Ltd’s (the second purchaser) purchase price over M Bank’s (the first purchaser) purchase price - £12,400.

We assume that each instalment is a part payment of the loan principal and interest. As the loan is at a fixed rate a straight line accrual of interest is acceptable. The principal in each instalment would be £4166 (£100,000/24) and the interest element would be £517 (£12,400/24).

The alternative finance return for each instalment is £517.