UK Company Loan relationships and derivative contracts – CTA2009
The key definition of a loan relationship is that it:
– is a money debt; and
– arises from a transaction for the lending of money.
Both elements have to be present for the arrangement to be a loan relationship.
Trading loan relationship
-Provided a company prepares accounts in accordance with UK GAAP or IFRS, no adjustments to interest expense for tax purposes re interest charge in the tax comp.
-Interest expense included in trading income
Distinction between trade and non-trade loan relationships
All profits or losses (including exchange gains and losses) arising from loan relationship are taxed or relieved as income, as follows:
– where the loan relationship arises in the course of a company’s trade, in the computation of trading income; or
– otherwise as non-trading credits or debits.
Calculating non- trade loan relationship debits and credits: CTA 2009 ss457-458
This includes all of the following:
– all profits and losses of the company which arise from the company’s loan relationships and related transactions;
– all interest under the company’s loan relationships;
– all expenses (see below) incurred for the purposes of the company’s loan relationships and related transactions; and
– exchange gains and losses arising to the company from its loan relationships.
Net debits on non-trading loan relationships
The non-trading loan relationship debit may be relieved for tax purposes in the following ways:
– in the current year and set against total profits including capital gains
– carried back against non-trading loan relationship credits
– used against future non-trading including capital gains
– surrendered as a group relief claim.
– Loans between related parties should be at arm’s length – hence need a group transfer pricing policy in place. If the loan is not at arm’s length, a different amount of interest income may be imputed in the UK.
There are 2 options followed:
1. Default fair value – follow P&L charges
2. Follow computational provisions in regulations 7, 8 and 9 of the Disregard Regulations (SI 2004/3256) to restore Old UK GAAP- accounted for on settlement only & remove fair value volatility.
– Periods after 1 January 2015, companies must elect in to regulations 7, 8 and 9 rather than the previous elect out approach. Companies which applied fair value accounting in earlier periods will continue with the same treatment without having to make new elections.
– There are strict time limits for the election, which are in (SI 2004/3256)
– Rules came into force in 2015, and if company commenced operations after the rules this date, no reliefs are available for a change in accounting policy.
– Financial instruments will be taxed as derivative contracts if they meet the definition of a “derivative contract” and includes the “accounting requirement” as defined by FRS 102. Generally derivatives value tied to the market price of underlying assets.
Sale and lease back tax implications
Disposal creates chargeable gains/losses
Opportunity to defer gain by rollover relief if qualifying assets
Purchaser pays SDLT and VAT (if buildings – some may not have VAT)
Pay SDLT on lease premium paid to lessor (plus VAT if there is option to tax)
SDLT on net present value of lease rentals payable in excess of [£150k] Some of the lease premium deductible as rent payable etc
Operating lease tax implications
Accounting/tax treatment aligned if UK GAAP or IFRS is being followed; hence lease expense deductible,
Worldwide debt cap
Applies when the following are met:
1. if one of the worldwide group companies should be “large”
2. At least 1 relevant UK company or UK PE (>75% holding, exclude dormant)
3. Gateway test:
– compute net average debt per relevant company if < 3m ignore; add all net debt - compare with 75% worldwide gross debt. if > 75%, compare expenses
– Compare tested expense amount (TEA) with available amount ie compute net interest per relevant entity (ignore if <500k) - Compare total relevant net interest to 75% of gross interest expense. Excess is disallowed; disallowed amount can be allocated to UK group companies. [/one_half]