INTM414520 - Compensating adjustments: Compensating adjustments for lenders

Compensating adjustments for lenders

TIOPA10/S175 has been amended to reflect changes made in other sections of TIOPA10/Part 4, notably the changes to the guarantees and acting together rules and the participation condition. 

Whilst the new legislation is more closely targeted, the overall intention of TIOPA10/S175 remains to limit compensating adjustments from being accessed for genuine arm’s length lending. 

TIOPA10/S175(2) applies where:

  • There is provision of borrowing which contains an amount that would not have been lent between independent enterprises but for a guarantee;
  • That guarantee has been provided by a person with whom the borrower has a participatory relationship under TIOPA10/Part 4; and 
  • The participation condition in relation to the borrowing provision would not have been met but for the acting together rules, or but for a notice under TIOPA10/S148A to deem the participation condition to have been met in a case that is analogous with the acting together rules in TIOPA10/S161. 

The effect of TIOPA10/S175(2) is that the amount that would not have been lent to the borrower is to be treated for the purposes of TIOPA10/S174(2) as though it had been lent to the guarantor on equivalent terms.  For example, this generally means that the compensating adjustment does not prevent taxation of any interest on this amount, notwithstanding that the deduction in respect of that interest was disallowed for the borrower.    

More information on the amended ‘acting together’ rules can be found at INTM414250 and further details about the TIOPA10/S148A participation notice can be found at INTM414220. 

 Commencement provisions

These rule changes are subject to specific commencement provisions.

For borrowing that occurs on or after 1 January 2026, these rules have effect for chargeable periods of a person that end on or after 1 January 2026.

For borrowing that occurs before 1 January 2026, these rules have effect:

  • in relation to chargeable periods commencing on or after 1 January 2028; or 
  • where a person has elected that the amendments should apply to it for a chargeable period, in relation to a chargeable period ending on or after 1 January 2026.