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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: transitional rules

Transitional measures for alternative finance arrangements

Purchase and resale arrangements and deposit arrangements

The rules for purchase and resale arrangements (CTA09/S503, formerly FA05/S47) originally made in FA 2005 in general have effect for any alternative finance arrangements entered into on or after 6 April 2005. However for deposit arrangements (CTA09/S505, formerly FA05/S49) the FA 2005 legislation also applies to any arrangements in existence before 6 April 2005 under which a profit share return is payable on or after that date.

Companies therefore have to bring the deposit arrangements into the loan relationships legislation as at 6 April 2005. Deposit arrangements are brought in as if they were loans made on the 6 April 2005 of an amount equal to the carrying value of the asset or liability representing the existing deposit arrangements. The notional carrying value is the amount, which would have been the carrying value of the asset or liability in the accounts of the company (prepared in accordance with GAAP), as if a period of accounts had ended immediately before 6 April 2005.

Diminishing shared ownership arrangements and profit share agency

The rules providing for a profit share agency arrangement (CTA09/S506, formerly FA05/S49A) and diminishing shared ownership arrangement (CTA09/S504, formerly FA05/S47A) introduced by FA06 have effect for any such arrangement entered into on or after 1 April 2006 in relation to corporation tax and 6 April 2006 in relation to income tax.

For profit share agency arrangements the legislation also applies to arrangements entered into before these dates under which a profit share return is payable on or after that date. Therefore, where companies are party to a profit share agency arrangement they will have to bring the arrangement into the loan relationship legislation as at 1 April 2006. The arrangements are brought in as if they were loans made on 1 April 2006 of an amount equal to the carrying value of the asset or liability representing the existing profit share arrangements. The notional carrying amount is the amount that would have been the carrying value of the asset or liability in the accounts of the company under GAAP as if the period of accounts had ended immediately before 1 April 2006.

Alternative finance investment bonds

The legislation introduced by FA 2007 on alternative finance investment bonds (CTA09/S507, formerly FA05/S48A) applies from 1 April 2007 for corporation tax purposes and 6 April 2007 for income tax and capital gains tax purposes - but see CFM44250 for disposals of bonds by non-corporates after 6 April 2007.

For loan relationships purposes, alternative finance investment bonds are brought into the regime on 1 April 2007 at their notional carrying amount. Where a UK financial institution or other company holding sukuk before 1 April 2007 has treated interest credits and any exchange gains or losses as part of their trading income, there is no objection to such amounts arising after 1 April 2007 being treated as trading loan relationship credits (or debits), so that the transition will have little - if any - practical effect.