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HMRC internal manual

International Manual

UK residents with foreign income or gains: corporation tax: Loan relationships

The rules do not generally refer to `interest’ as such; nor do they distinguish between capital and income items. The legislation taxes `debits’ and `credits’ arising to a company on its loan relationships. These amounts include capital and income profits, gains, losses, foreign exchange differences, payments received and made and expenses paid in connection with loan relationships. The rules also apply to non-trading profits and losses on derivative contracts (see CFM50000).

The debits and credits relating to loan relationships to which a company is a party for the purposes of a trade carried on by it (trading loan relationships) are respectively expenses and receipts of that trade. Such debits and credits are not specifically set off against each other.

Where a company is not a party to the loan relationship in question for the purposes of a trade carried on by it, that is where the loan relationship is a non-trading loan relationship, all the debits and credits are aggregated. Debits and credits on all non-trading loan relationships go into the same `pot’, which may therefore include credits relating to both UK source interest and to interest which would previously have been assessed separately as foreign income. If the net figure resulting from the totality of the credits and the totality of the debits is positive, there is a charge to tax. If the net figure is negative, there is a deficit which can be relieved in various ways.