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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Other tax rules on corporate finance: structured finance: the first two relevant effects

The legislative remedy: relevant effects 1 and 2

The first relevant effect, in section 759 (3) is that an amount of income which would otherwise (that is, apart from the arrangements) have been charged to tax as income on the borrower, or a person connected with the borrower (or in a case where the partnership is borrower on a member of the partnership) is not so charged. This would cover cases where the income is ‘pure income profit’.

The second, in section 759 (3), is that an amount which would otherwise have been brought into account in calculating the borrower’s income (or in a partnership case, a member of the partnership’s income) is not so brought into account.

This covers receipts which form part of the calculation of a profit whether of a trade, a property business or some other business.

So there is a relevant effect where under a structured finance arrangement the borrower has received a lump sum and has in return transferred income with the result that the income is no longer charged to tax on him. The legislation then provides that where there is such an effect the arrangement will not have that effect so that for tax purposes the income is restored to the borrower (including a person connected with the borrower where that person is the person whose income would otherwise escape tax).

This rule has no effect in relation to the lender. The structured finance arrangement legislation does not modify the tax treatment of the lender in any way - see CFM73150.

Example based on CFM73030

Company A holds an asset on which income of £22.5m a year will arise. It transfers this asset to the finance provider, a bank, for a lump sum of £100m for a period of 5 years, at the end of which it can reacquire the asset for nothing. During the 5 years, income of total £112.5m is paid to the bank.

All the conditions in section 758 are met.

  • Company A receives money and records a financial liability in respect of that amount.
  • The company disposes of an asset to the lender and the lender will receive payments in respect of that asset that will reduce the financial liability (i.e. repay the loan)

It is then necessary to consider whether the arrangement has the relevant effect. It does have that effect if (apart from section 759) the income of £112.5m would have ceased to be taxable on Company A as income. Accordingly, sections 759 and 760 would restore the income to the borrower ensuring it was taxed on the same basis as if the arrangement had never been entered into.

As explained at CFM73030, the company will also be allowed relief for the finance charge of £12.5m shown in its accounts as representing its actual economic cost of borrowing the £100m on the same basis as if it had entered into an ordinary loan on which interest was payable.

In most cases it will be readily apparent how much income had been ‘alienated’ because the income will still be shown in the company’s accounts. So simply following the accounts will give the right result in these cases.