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HMRC internal manual

International Manual

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

Repealed with effect for related transactions on or after 12 March 2008

ICTA88/S807A(3) modifies the position described in the penultimate sub-paragraph of INTM167210 for interest on non-trading loan relationships only. It does not apply where the credit is brought into account in accordance with FA96/SCH11/PARA1 (2) (the I minus E basis applicable to insurance companies).

It applies where

  • a credit relating to an amount of interest under a non-trading loan relationship is brought into account by a company

and

  • that amount of interest is paid to a person other than the company as a result of any related transaction (ie any disposal or acquisition, in whole or in part, of rights or liabilities under the loan relationship) - see below for stock loans and repo transactions

and

  • if the company had been entitled at the time of the related transaction to receive a payment of an amount of interest equal to the amount of interest to which the credit relates, it would have suffered tax on the amount of interest received under the law of a territory outside the UK.

Where all those conditions are met, the company is entitled to claim credit under the unilateral provisions in ICTA88/S790 (4) for that amount of foreign tax as if it were tax paid under the law of the foreign territory on the amount of interest to which the credit relates. It is not necessary for the company to demonstrate that foreign tax has in fact been suffered by the person to whom the interest was paid. The amount of credit is subject to the ‘period of ownership’ restriction in ICTA88/S807A (1) and (2) described in INTM167210. The credit does not extend to tax ‘spared’ (INTM161270) since such relief is not available under ICTA88/S790 (4). Nor does Section 807A(3) enable the amount of the interest to be treated as reduced by notional foreign tax under ICTA88/S811.

This reintroduces the essentials of the corresponding part of ICTA88/S807 which ceases to apply for the purposes of Corporation Tax following the introduction of the loan relationships legislation (INTM163070).

Stock loans and repo transactions were originally related transactions for the purposes of Section 807A(3). Interest is regarded as continuing to accrue in the hands of the economic holder of the security (that is the lender or transferor). However, amendments to Section 807A made by FA97/S91 disapply Section 807A(3) in the case of repo or stock lending transactions made on or after 26 November 1996. In such cases, relief will not be given automatically but the normal rule in INTM167210 will apply.