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HMRC internal manual

Corporate Finance Manual

Debt cap: intra-group short-term debt: long-term aggregated loan relationships

This guidance applies to worldwide group periods of account ending before or straddling 1 April 2017.

Meaning of ‘long-term aggregated loan relationship’, and how it is treated

Regulation 5 of The Corporation Tax (Exclusion from Short-Term Loan Relationships) Regulations 2009 defines what is meant by a ‘long-term aggregated loan relationship’.

The starting point for consideration is a ‘finance arrangement’ between two group companies. Taken by itself, the finance arrangement may or may not be short-term. Nor does it matter whether the financing arrangements are loan relationships or money debts, or a mixture of both.

It must be one of a number of finance arrangements which meet the following conditions:

  • they must exist between the same two companies
  • there must be no repayment terms for each individual loan relationship, and
  • the companies’ accounts must show a single net balance between them at all times, rather than reporting individual debtor or creditor balances on each finance arrangement.

Where these three conditions are met, regulation 5(5) goes on to aggregate all of the finance arrangements, and then to apply the tests of TIOPA10/S321 to the aggregate.

It is possible (although perhaps uncommon) that an intercompany loan account will only exist for a short period of time, say a matter of months. Within the space of 12 months, all of the borrowing under the loan account is repaid, and there is no intention to charge further amounts to the account.

In this case, the loan account as a whole will meet one of the conditions in section 321 (probably the section 321(3) condition). The finance arrangements which make it up will not be long-term aggregated loan relationships, and the Exclusion from Short-Term Loan Relationships Regulations will have no further relevance. If the loan account as a whole endures for less than a year, it is clear that each constituent finance arrangement will be short-term, and the two companies may elect under section 319 for financing expense and income relating to some or all of these constituents to be disregarded.

(This must be distinguished, however, from the situation where there is merely a gap before there is a further borrowing under the loan account. The arrangements may then have a long-term funding purpose (see CFM92110)).

If, on the other hand, the aggregate loan account does not meet either of the section 321 conditions, each constituent finance arrangement is dubbed a ‘long-term aggregated loan relationship’. This term is relevant only within the context of the regulations: it applies to each separate advance within the overall loan account, and not to the account as a whole. Somewhat confusingly, it does not imply that the finance arrangement is necessarily long-term in itself, nor that it is a loan relationship.

Once a finance arrangement has been identified as a long-term aggregated loan relationship, regulation 2 provides that it cannot be the subject of a section 319 election - even if, viewed in isolation, it would satisfy the section 321 requirement.