Debt cap: intra-group short-term debt: loans and money debts with a fixed term
Section 321 (2) - fixed-term financing arrangements
TIOPA10/S321 (1) (b) provides that a finance arrangement is a short-term loan relationship if either of two conditions are met. The first condition is that the finance arrangement is a money debt or a loan relationship that is due (from the outset) to terminate within 12 months of starting and does not terminate in the period of account of the worldwide group under consideration - see TIOPA10/S321 (2). Guidance on the second condition is at CFM92070.
A loan relationship under Part 5 of CTA 2009 is defined by CTA09/S302 (1) as a money debt arising from the transaction of lending money. But a money debt that is not a loan relationship, such as a trade debt, can also be a ‘short-term loan relationship’ within section 321 - although many trade debts will not carry interest, and therefore cannot give rise to financing expense amounts or financing income amounts.
This first condition is concerned with fixed term finance arrangements. It allows for the situation where a fixed term arrangement of less than 12 months is due to terminate after the end of the period of account of the worldwide group - it can be treated as a short-term loan relationship from the outset.
Some examples are given below. They assume that the financing arrangements in question do not have a long-term funding purpose (see CFM92110).
In period of account ended 31 December 2012, a UK resident group company borrows £100 million from another group company for 6 months. The loan falls due for repayment on 28 February 2013, i.e. in the next period of account. This meets the first condition. It is a short-term loan relationship, and the borrower and lender can make a joint election under section 320, under which interest accruing on the debt in period ended 31 December 2012 is disregarded. The companies may or may not choose to make a further election for period ended 31 December 2013.
On 1 December 2012, in period of account ended 31 December 2012, a UK resident group company issues loan notes, with a maturity of three months, to another company in the group. The notes are not interest-bearing, but are issued at a discount. Again, the first condition is met, and the two companies may make a section 320 election for period ended 31 December 2012. The effect is that discount accrued up to 31 December is not a financing expense amount of the issuer, or a financing income amount of the holder.