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HMRC internal manual

International Manual

HM Revenue & Customs
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Distribution exemption: Anti-avoidance legislation: loan relationships schemes

CTA09/S931M: Schemes in the nature of loan relationships

Where a company’s shareholding is part of a scheme or arrangement to produce a return which is economically equivalent to interest it will often be recharacterised for all tax purposes as a loan relationship.

There are certain exceptions to this general rule - in particular, a shareholding in a connected company will generally not be recharacterised in this way. CTA09/S931M is intended to reduce the risk of schemes that create an interest-like return in a company outside the scope of the CFC rules.

S931M applies to a distribution where all of the following apply.

  • The distribution is part of a scheme to produce a return which is economically equivalent to interest (see below) for the recipient of the distribution and / or other connected company or companies, whether individually or in aggregate.
  • The recipient and payer of the distribution are connected companies within the meaning used in CTA09/S466 for the accounting period in which the distribution is made.
  • The distribution is not exempt by virtue of S931E (but would be exempt under another class but for S931M).

Note that it is necessary to consider two different meanings of the word “connected” in this section.

The term “relevant company” takes its meaning from CTA09/S931T, where its definition includes a person connected with company that receives the distribution. This means that when considering a scheme which produces an interest like return which is economically equivalent to interest, it is necessary to use the CTA09/S1316 definition (see the first bullet point above).

On the other hand, when considering the requirement in S931M(6) that there must be a connection between the payer and the recipient should be connected, it is necessary to use the CTA09/S466 definition of “connected” (see the second bullet point above).

S931M does not apply in any case where a distribution is exempt by virtue of S931E, since in such cases the CFC legislation is always potentially in scope.

The definition in S931M(5) of a return which is economically equivalent to interest is essentially the same definition as is used in CTA09/S486B and CTA09/S521C for the purposes of CTA09/Part 5. It is slightly adapted to reflect the different context in which it is applied.