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HMRC internal manual

Corporate Finance Manual

From
HM Revenue & Customs
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Other tax rules on corporate debt: transfers of income streams: company transferors: relevant amount: timing

Company transferors: relevant amount: timing

CTA10/S753(3) states that in cases where the consideration is the measure of the income, it is to be treated as arising when, in accordance with generally accepted accounting practice (GAAP), it is recognised in the transferor’s profit and loss account or income statement. Where market value is used, then the excess over the consideration is to be treated as arising at the same time that it would have been if consideration equal to full market value had been received.

If the timing rules in S753(3) do not ensure full recognition of the income, S753(4) provides that the amount that is not recognised is to be treated as arising at the time that it becomes apparent that not all the income would be recognised in an accounting period of the company by virtue of s753(3).

Example

H Ltd has transferred a right to income to another company, J Ltd. The consideration is credited to a reserve and released at the rate of 10 percent each year for the next 10 years in accordance with GAAP. The company decides to migrate at the end of the second year. At this point just 20 percent of the income has been recognised in company accounting periods and the remaining 80 percent, following the timing rule at S753(3) alone, would not be recognised in any accounting period and would therefore escape UK taxation. This would become apparent at or prior to migration and S753(4) establishes that this remaining 80 percent is also to be treated as arising at that time.