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HMRC internal manual

Corporate Finance Manual

Debt cap: intra-group short-term debt: finance arrangements with a long-term funding purpose

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

Other exclusions from short-term loan relationships

Regulation 2 of The Corporation Tax (Exclusion from Short-Term Loan Relationships) Regulations 2009 (SI2009/3313) provide for a further category of finance arrangements to be excluded from being short-term loan relationships. This caters for funding arrangements that, if viewed in isolation, satisfy the tests in TIOPA10/S321, but from a wider perspective form part of the long-term funding of the debtor company. Regulation 2(a) refers to all or part of the finance arrangement being made for a ‘long-term funding purpose’.

Regulation 3 defines what is meant by ‘long-term funding purpose’. A particular company may have an identifiable need for funds, which is likely to persist over a period of time. The group may put arrangements in place to meet that funding need. It is also possible that funding arrangements may be driven from the creditor’s side - a particular company or companies has a surplus of cash for which it needs to find a home, either in the short-term or for a longer period.

In either case, regulation 3 looks broadly at whether, notwithstanding the terms of any particular loan relationship or money debt, it is ‘reasonable to assume’ that the funding arrangements of which the loan or debt forms part will be in place for more 12 months.

A finance arrangement is made for a long-term funding purpose if either of two conditions is met. One of these conditions relates to an anti-avoidance rule at regulation 4. This is discussed further at CFM92140.

The other condition is that

  • it is reasonable to expect that money debt created under the finance arrangement will not be settled within 12 months, and
  • it is reasonable to expect that loan relationships created under the arrangement will not terminate within 12 months of it coming into force.

However, regulation 3(2) makes it clear that a finance arrangement is not necessarily settled or terminated when an individual money debt or loan is repaid. It covers two particular circumstances:

  • where the repayment is only likely to be achieved by further borrowing, and
  • where the finance arrangement is settled or terminated temporarily by funds available for a limited time.

These circumstances represent particular cases where it is ‘reasonable to expect’ that finance arrangements will last more than a year. They do not detract from the generality of regulation 3(1).

CFM92120 gives examples of cases where it might be reasonable to expect that the funding purpose is long-term, and CFM92130 gives examples of short-term funding purposes.