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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Deemed loan relationships: shares with guaranteed returns: non-qualifying shares: debits and credits

Debits and credits to be brought into account under S526

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

Where S526 applies, the debits and credits to be brought into account are in general calculated in the same way as cases to which S524 applies (see CFM45060).

CTA09/S534 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.

When the increasing value condition applies

CTA09/S534(5) provides that where the increasing value condition applies, no debits are to be brought into account in respect of any transaction which is intended to prevent the share increasing in value in an interest-like manner. This is to prevent companies extracting the value out of a share by shifting the value to another asset so as to generate artificial debits. For accounting periods ending on or after 6 March 2007, this rule 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 debits for genuine 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, CTA09/523(3) means that no debits of any kind are to be brought into account by the investing company as respects the shares.

When the associated transaction condition applies

CTA09/S534(6) provides that where the associated transactions condition applies, debits and credits are to be brought into account for the purposes of CTA09/PT7 (derivative contracts) by the investing company in respect of any ‘associated transaction’ as if that transaction were a derivative contract (where that is not the case), and those debits and credits are to be determined on the basis of fair value accounting.

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/S534(6) and (7) mean that the amount of the debits brought into account by the investing company as respects the share cannot be greater than the amount of the credits brought into account in respect of the associated transaction under Part 7 of CTA09. Consequently, the net position will be that no overall debit may be brought into account.

Issuing company

Where S526 applies to the investing company, the section says nothing about the issuing company. Its tax affairs should be computed 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.