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HMRC internal manual

Corporate Finance Manual

Other tax rules on corporate finance: structured finance: finance charges

Deduction for finance charge

The aim of the structured finance rules is to ensure that the tax system is neutral as between borrowing under a structured finance arrangement and other forms of borrowing. But the rules considered above would not on their own achieve that result because, for there to be neutrality, the borrower would need to obtain relief for its costs of funding. As a matter of legal form the borrower is not party to a loan and does not pay interest, so it might be difficult for it to obtain relief for the finance charge that is shown in its accounts equating in substance to interest and possibly described as such in its accounts.

Sections 761 and 762 therefore deals with the granting of relief to the borrower for the finance cost element in the arrangement. Since the arrangement will involve the borrower paying more to the lender than it receives from the lender and this excess is in substance interest on the loan, the borrower will be entitled to relief for that excess to the extent that it is reflected in the accounts as a finance charge.

TIOPA10/SCH5/PARA2 deals with borrowers who are persons within the charge to income tax and treats any amount recorded in the accounts as a finance charge as being an amount of interest payable on a loan. Where the receipts that are temporarily alienated under the structured finance arrangement are trading receipts, the interest will be part of the deductions allowed under ITTOIA05/PT2/CH3.

Section 761 (3) deals with borrowers within the charge to corporation tax and in that case the advance under the arrangement is treated for the purposes of Part 6 CTA 2009 (loan relationships) as a debtor loan relationship. Any amount shown in the accounts as a finance charge is treated as interest payable under that relationship. Section 761 (4) refers to this amount as ‘deemed interest’.

The relevance of treating the finance charge as interest under a loan relationship is that the amount will become subject, where appropriate, to provisions in the loan relationships code which apply to interest such as the late interest rule (CFM35800) and unallowable purposes (CFM38100). In order to give a rule as to the time of payment of the interest section 761 (4) treats the payments received by the lender under the structured finance arrangements as divided into principal and interest with the interest element of each payment treated as paid when the payment is received by the lender.

Section 762 (3) provides that where relief is available for the finance charge in the case of a partnership, references to the accounts include the accounts of the partnership and amounts treated as interest are treated as interest payable by the partnership, even if reflected in the accounts of the individual partner. In the corporate case this will mean that the provisions of CTA09/PT5/CH9 (CFM36000) apply to attribute the interest to the company partners in accordance with their shares and each partner will be subject to the provisions of Part 6 in relation to that part of the interest.