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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Old rules: loan relationships: connected persons: overview

Overview of connected persons

This guidance applies only to accounting periods starting before 1 January 2005

Since the inception of the loan relationships legislation in FA 1996, special rules have applied to loan relationships held by connected parties. CFM35000 onwards explains the current rules.

CFM80100 onwards explains that one of the key features of the loan relationships rules for accounting periods beginning before 1 January 2005 was that the computation of credits and debits followed the accounting treatment, where this was in accordance with one of two authorised accounting methods, the authorised accruals basis or the mark to market basis.

Consequences of connection

Where the parties are connected, FA96/S87 required the use of the authorised accruals method in determining loan relationships credits and debits (FA96/S87(2)).

As with the current rules, the main consequences of being connected were

  • bad debt relief and consortium relief were restricted
  • debits for interest and discount payable to certain types of connected person were postponed until the interest was paid or the security redeemed.

CFM81020 has more on the consequences of connection.

Connection means control

FA96/S87 dealt with connection through control. It applied to loan relationships of companies where there was a connection, at any time in an accounting period, between

  • the debtor and the person standing in the position of creditor for the loan relationship, or
  • the creditor and the person standing in the position of debtor for the loan relationship.

The legislation used the term ‘standing in the position of creditor/debtor’ for a reason. FA96/S87(5) explained that the term includes persons standing indirectly in that position, for example through a series of loans. CTA09/S348 maintains that principle (CFM35160).

CFM81030 has more on the meaning of control.