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HMRC internal manual

Corporate Finance Manual

Other tax rules on corporate finance: structured finance: the third relevant effect

The legislative remedy: relevant effect 3

The third case where there is a relevant effect is where as a result of the arrangement the borrower (or in a partnership case, a member) would, apart from section 759, have become entitled to an income deduction. An ‘income deduction’ is defined in section 759(6) to mean any deduction in calculating income (e.g. an expense in a Case I or trading computation, or a Schedule A or property business computation) or a deduction against total income (for income tax cases) or total profits (for corporation tax cases).

This rule is intended to cover arrangements that are commercially similar to those just considered, but where instead of the loan being repaid out of alienated income it is repaid by a newly created expenditure stream for which tax relief is claimed. Again the intended effect is for tax relief to be given for interest and capital. This type of arrangement is illustrated by the example at CFM73120.