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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: Condition A cases

The criteria for a Condition A case

The complex rule can apply in two circumstances, referred to as the ‘Condition A’ and ‘Condition B’ cases

Condition A is set out in section 763 (2) and requires that:

  • a person who the legislation calls the “transferor partner” disposes of an asset under the arrangement to a partnership which the legislation calls “the borrower partnership”.
  • the borrower partnership is one of which the transferor partner is a member immediately after that disposal. It does not matter whether it was a partner before the disposal, to ensure that persons joining the partnership as part of the arrangements can be caught.
  • the borrower partnership receives money or another asset called the advance, as in section 758, from another person called the lender.
  • the accounts of the borrower partnership have to record in accordance with generally accepted accounting practice (GAAP) a financial liability in respect of the advance. Section 767 (2) makes it clear that any reference to the accounts of a borrower partnership (to see if the accounts record a financial liability) includes a reference to the accounts of the transferor partner. Section 774 (2) provides that references to the accounts of the transferor partner include a reference to the consolidated group accounts of which that person is a member and section 774 (3) determines the period of account in which the advance is received.
  • there is a ‘relevant change’ CFM73210 in relation to the membership of the partnership involving the lender (including a person connected with the lender). ‘Relevant change’ is defined by section 764.
  • the share of the lender in the profits of the borrower partnership falls to be determined (wholly or partly) by reference to payments in respect of the security.
  • in accordance with GAAP those payments reduce the amount of the financial liability.

Consider again the example at CFM73170. All of the conditions in section 763 are satisfied in relation to the arrangement. Therefore this is a Condition A case.