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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: consequences of connection

Consequences of connection

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

The key loan relationships consequences of connection were that

  • relief for bad debts and consortia bad debts was restricted
  • debits for interest and discount were postponed in some circumstances, until the interest was paid or the security redeemed.

Bad debts

A creditor company which followed an authorised accruals method had to assume that all amounts would be received in full and on time. FA96/S85(3)(d) also required it to ensure that it made the proper adjustments as required by the authorised arrangements for bad debt, which were set out in FA96/SCH9/PARA5, and which allowed a departure from the assumption that all amounts would be received in full.

FA96/SCH9/PARA6 then disapplied these authorised arrangements in relation to connected persons - see CFM81100.

The current rules on ‘impairment’ and connected persons are set out at CFM35300 onwards.

Consortium relief

FA96/SCH9/PARA5A prevented companies that were not connected but were members of a consortium from benefiting from both debits for bad debts and group relief. CFM81300 has more details. The current rules on consortium relief are at CFM35600 onwards.

Late interest and relevant/deeply discounted securities

FA96/SCH9/PARA2 denied a deduction for interest payable to certain connected persons where the interest remained unpaid 12 months after the end of the accounting period in which it accrued, and where the recipient was outside the loan relationships rules. The interest was deductible when paid.

FA96/SCH9/PARA17 and PARA18 contained similar rules which postponed the deduction for discount accruing on ‘relevant discounted securities’ (from 1 April 2005 referred to as ‘deeply discounted securities’) held between connected companies or by close company participators, until the security was redeemed.

These rules remained unchanged at 1 January 2005. See CFM35800 for guidance on late interest, and CFM37200 onwards for guidance on discounted securities. CFM81070 provides cross references from the FA 1996 legislation to that in CTA09.