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HMRC internal manual

Corporate Finance Manual

Old rules: convertibles pre 2005: conditions for borrower

Overview of S92A

This guidance applies to periods of account beginning before 1 January 2005

Before FA 2002, there were rules that applied to the holder of a convertible security in FA96/S92, but no rules that applied to the issuer of a security.

FA 2002 introduced FA96/S92A, which applied to the issuer of a security (the borrower) to exclude any expenses that related to the cost of

  • issuing shares on conversion
  • acquiring shares to be offered in exchange for the security

that accrued on or after 26 July 2001.

Securities which fell within s92A

FA96/S92A applied to allloan relationships issued by the borrower that met the condition in S92(1)(b). A loan relationship satisfied the condition if the holder had the right to convert the security, or exchange the security for shares, in

  • the borrower, or
  • any other company.

So S92A applied to any convertible securities - they did not have to fulfil all or indeed any of the conditions for the lender in S92 apart from S92(1)(b).

Tax effect of S92A

Where FA96/S92A applied, the borrower could not bring in any debits that related to

  • purchasing shares that were to be offered in exchange for the security, or
  • any expenses connected with issuing shares.

The disallowable expenses were those defined in FA96/S84(3) as being directly related to

  • entering into related transactions
  • making payments in pursuance of related transactions
  • ensuring the receipt of payments relating to the acquisition of shares by the lender.

Any debits that were introduced had to be accounted for in accordance with an authorised accruals method (for accounting periods starting on or after 1 January 2005, the amortised cost basis would apply).