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HMRC internal manual

Savings and Investment Manual

Relief for interest paid: arrangements minimising risk to borrower

Restriction on relief where arrangements minimise risk to borrower

This guidance applies to interest paid on or after 19 March 2009 

The interest relief rules encourage investment in certain small businesses carried on commercially and with a view to profit. The return on a normal investment in such a business would not be a guaranteed one such that after deducting obligations under the loan from sums to which the investment gives rise the investor was certain to be able to exit with a profit.

New section ITA07/384A was introduced by FA09 to counter schemes notified to HM Revenue & Customs, where arrangements were put in place that meant that there was only an insignificant risk that the investor could fail to make a profit after the availability of interest relief was taken into account. There are examples of such schemes at SAIM10130 

ITA07/S384A denies relief for interest if the loan is made both as part of arrangements which ‘appear very likely to produce a post tax advantage’ and the arrangements seem to have been designed to reduce any income tax or capital gains tax to which the borrower would otherwise be liable (the circumstances in which arrangements are to be treated as so designed are explained in sub-section(10)).

It is intended to ensure that relief is not available in any case where there is no more than an insignificant risk that the payments to which the wider scheme arrangements give rise will not produce a profit. It will not affect genuine commercial investments in business where there is uncertainty as to the return that will be produced from the arrangements nor will it apply merely because the investor hedges the investment in some way. Although a hedge may reduce the risk of loss it does not guarantee a post-tax profit.