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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: transfer pricing

Alternative finance arrangements and transfer pricing

If an alternative finance contract is not on arm’s length terms and as a consequence TIOPA10/Part 4 applies, then the contract may be excluded from the alternative finance arrangements legislation (CTA09/S508). This is to prevent persons obtaining the benefit of the alternative finance arrangements legislation if cross border financing is used which exploits non-taxation in an overseas jurisdiction.

The exclusion applies if:

  • the alternative finance contract would (but for CTA09/S508) be within the alternative finance legislation as an arrangement with an alternative finance return or profit share return; and
  • TIOPA10/Part 4 requires the profits and losses of any person who is party to the alternative finance contract to be computed on an arm’s length basis; and
  • any person who under TIOPA10/Part 4 is an affected person is entitled to the relevant return (either an alternative finance return or profit share return) or an amount representing the relevant return, but is not subject to income tax, corporation tax or any corresponding tax on the relevant return in any territory outside the UK.

The legislation refers to an amount representing the relevant return to ensure that payments made through third parties as a series of transactions are also excluded from the alternative finance arrangement legislation if they are caught by CTA09/S508.

In addition the payer of the relevant return on an alternative finance arrangement that would, but for CTA09/S508 be within the alternative finance arrangement legislation is prevented from claiming a deduction for the relevant return (CTA09/S520). The payer cannot claim a deduction when computing its profits or gains for the purposes of corporation tax or income tax or claim the relevant return as a deduction against total income or total profits. Nor can a company paying the relevant return surrender the amount of that return as group relief if a deduction is prohibited by CTA09/S520.