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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Deemed loan relationships: shares with guaranteed returns: outstanding third party obligations: debits and credits

Debits and credits to be brought into account under S524

This guidance applies to companies that hold shares up to 21 April 2009

CTA09/S534(1) requires that where the section applies, the debits and credits to be brought into account by the investing company as respects the share are to be determined on the basis of fair value accounting.

The reason for this is to prevent companies from deferring any tax charge by accounting on an amortised cost basis so that the pre-determined increases in value of the share are not brought into account until the end of the scheme where the shares are disposed of. The use of fair value accounting ensures that value increases are taxed year by year as they accrue, in the same way as the interest they represent would be taxed.

CTA09/S525(3) requires that the fair value of a share that is subject to outstanding third party obligations must include the fair value of those obligations.

CTA09/S534(4) provides that no debits are to be brought into account in respect of any transaction which is intended to prevent the share being an ‘interest-like investment’ (see CFM45080). This is to prevent companies extracting the value out of a share in an artificial way by shifting the value to another asset so that although the investing company retains the economic benefit of the interest-like return, the value of the share itself does not increase in an interest-like way. For accounting periods ending on or after 6 March 2007, the predecessor rule at FA96/91A(4) was amended to make it clear that where a company has entered into such a transaction, changes in the fair value of the share will be calculated as if the transaction had not occurred.

For accounting periods ending before 12 March 2008, this provision does not prevent relief for genuine debits for falls in value arising from, say, changes in prevailing interest rates, or a movement in exchange rates where the share is not denominated in sterling.

However for debits in relation to accounting periods ending on or after 12 March 2008, and only in connection with debits that relate to any time on or after that date, CTA09/S523(3) ensures that no debits of any kind are to be brought into account by the investing company as respects the share.

In practice, it will be extremely rare for shares that give rise to net losses to meet the conditions in CTA09/PT6/CH7 since such shares are unlikely to give rise to interest like returns.

Where a share within CTA09/S524 pays a dividend, the payment of a dividend will not give rise to a credit for loan relationships purpose since the value of a dividend will have been recognised as part of the fair value of the share prior to its payment. Equally, the payment will not give rise to a debit in the profit and loss account. The bookkeeping on payment of dividends is debit bank, credit share value so there is no net profit and loss effect.

Issuing company

Where S524 applies to the investing company, the section says nothing about the issuing company. Its tax affairs should be determined in the normal way, and in particular, no debits or credits fall to be brought into account for loan relationships purposes in respect of the shares it has issued.