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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: meaning of commercial rate of interest

Commercial rate of interest

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

All the rules in CTA09/SPT6/CH7 define an interest-like return in terms of ‘return on an investment of money at a commercial rate of interest’. A definition of ‘commercial rate of interest’ was inserted by F(2)A05/SCH7/PARA13 as new FA96/S103(3A). Note, however, that FA96/S103(3A) was repealed by FA08/SCH22/PARA19(1) in relation to times on or after 12 March 2008.

The section provides that for the purposes of loan relationships, a commercial rate of interest, in the case of a company and any asset, is:

  • a rate (‘the simple commercial rate’) that is reasonably comparable to the rate that the company could obtain by placing on deposit the money it invested in the asset, or
  • in any case where -

    • the likely rate of increase in the value of an asset is in question, and
    • that likely rate is lower than the simple commercial rate, and
    • the difference is a result of an expectation that the company would also obtain a tax advantage as a result of investing in the asset,
  • that lower rate.

For these purposes, a ‘tax advantage’ has the meaning given by ICTA88/S709 (1).