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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 debt: group mismatch schemes: tax capacity: example

Company A and company B are within the same group. Company A issues a £100 million zero coupon bond to company B that can be converted into ordinary shares in company A.

Company A accounts for the bond in accordance with International Accounting Standards and bifurcates the bond into an equity element valued at £10 million and a debt element of £90 million.

Company B accounts using old UK Generally Accepted Accounting Practice and therefore does not bifurcate for accounting purposes and so accounts for the debt element at £100 million.

Company A claims a finance charge of £10 million over the life of the bond whereas company B brings in no equivalent credits.

The scheme - previously caught by section CTA09/S418 - is a GMS because at the point it was entered into it was practically certain to produce a relevant tax advantage.

In this example, if CTA09/S418 were not in existence, the relevant tax advantage would be the £10m brought to account by company A over the life of the bond and it would be these debits that the group mismatch rules would act on to not bring them into account.

If the convertible loan carried a low rate of interest that company A and company B brought into account symmetrically (but with company A still claiming additional deductions) the interest debits would form part of a single finance charge, while the credits would be the creditor’s CTA09/Part 5 profits. Both amounts would be scheme losses and profits and would also be disregarded.