Debt cap: intra-group short-term debt: debts with no defined repayment date
This guidance applies to worldwide group periods of account ending before or straddling 1 April 2017.
Section 321 (3) - loans or debts that actually terminate within 12 months
The second condition, in TIOPA10/S321 (3), is that the finance arrangement is a money debt or a loan relationship that terminates within 12 months of starting, whether that is within the period of account of the worldwide group under consideration, or a later period.
This condition can apply to either a fixed term arrangement, or to borrowing that has no fixed date for repayment (a ‘floating term’ finance arrangement).
Fixed-term borrowing for less than 12 months will always come within either the first condition or second condition, and in practice it is immaterial which condition is met. For example, suppose that in the first example in CFM92060, the borrower has the option to repay the l6-month loan early and in fact does so, so that borrowing and repayment both occur in the same period of account. Technically, the borrowing will now meet the section 321 (3) condition, rather than that in section 321 (2), but the consequences are exactly the same - borrower and lender can make a section 319 election for the period of account to 31 December 2012.
More importantly, the second condition caters for loans or debts that have no fixed date for repayment, but in practice are repaid within 12 months. Such repayment may take place before the end of the period of account, so by the end of the period the companies concerned will know that the debt is short-term. Alternatively, the debt may be settled or the loan terminated in the next period of account. In such a situation the condition is only met after the end of the period; the companies may still make a short-term debt election, but this might entail the group having to make amended statements of disallowance and disregard for that period of account - see the example at CFM92080.
Company A lends £100 million to fellow group company B. The terms of the loan are such that the lender can unilaterally require repayment of the loan, in whole or in part, at any time. Equally the borrower can unilaterally repay the loan, in whole or in part, at any time. At the time when the loan is made, company B has the firm intention of repaying the loan within 6 months. In the event, however, the loan - which was made on 1 June 2012 - is not repaid until 5 August 2013. It is not a short-term loan. The intention of the borrower as to the period of the borrowing is not determinative.
Company C, in the course of its trade, supplies goods to another company in the group, D. The goods are supplied on C’s standard terms - invoices to be settled within 30 days, with interest charged on late payment. Company D does not, however, settle the invoice within 30 days and, although company C charges interest on the trade debt, it takes no steps to enforce payment. The debtor company finally settles the invoice after 10 months. The money debt meets the condition in TIOPA10/S321 (3)(a), so that companies C and D may jointly elect that the interest is not treated as a financing expense amount of D, or a financing income amount of C.
In year ended 31 March 2009, company G borrows £500 million from a syndicate of external banks. In year ended 31 March 2013, the group to which G belongs refinances its external debt, and as part of this exercise company H, the parent of G, buys in the debt from the bank. Three months afterwards, H releases G from its debt.
This is not a short-term loan relationship. The tests at section 321 focus on the duration of the loan relationship or money debt, not who is party to it, and are independent of the requirement in section 320 (4) that the creditor and debtor making the election should be members of the same group. Here, the loan relationship ‘came into force’ in year ended 31 March 2009, and only terminated several years later, even though it was only an intra-group loan for three months. The condition at section 321(3) (b) is therefore not met.