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HMRC internal manual

General Insurance Manual

Taxation of the investment return: corporate and government debt: accounting periods ending after 31 March 1996: introduction

Legislation was introduced in FA96 which made far-reaching changes to the tax treatment of all debt, and transactions in debt held or issued by companies. It removed the capital/revenue distinction and requires accounts figures to be followed sweeping away much complex statute law.

The main guidance on the subject is in the Corporate Finance Manual at CFM5000+ for accounting periods beginning on or after 1 October 2002. For earlier periods see the Corporation Tax Manual at CTM50060+).

A loan relationship is the basic concept for these rules - see CTM50060+ and CFM5050+.

A company which is a party as creditor to a loan relationship in the course of activities forming an integral part of its trade will treat the credits and debits brought into account for tax purposes as receipts or expenses of the trade.

The words “an integral part of its trade” are derived from Nuclear Electric plc v Bradley 68TC670 (see GIM5020) and are enshrined in statute (FA96/S103 (2)). It follows that, in relation to current (non-structural) assets all interest, discount and increases in value or profits on sale will be trading receipts, while decreases in value (including impairment) and losses on sale will be trading expenses.

For liabilities the test is whether the company is a party to them for the purposes of the trade. This is a somewhat wider test than the ‘integral part’ test for assets. CTM50200 and CFM5301 give further guidance.

Any assets or liabilities not falling within the ‘integral part’ or ‘purposes of the trade’ tests are treated as non-trading items - this covers, for example, loans made to subsidiaries as structural assets. Refer to GIM9000+ for general insurance companies carrying on business on a mutual basis.