Paragraph 4: Loan relationships involving connected debtor and creditor where debits exceed credits
40.Paragraph 4(1) amends section 418 of CTA (loan relationships treated differently by debtor and creditor). Section 418 was introduced in 2008 to block schemes that involved the provision of intra-group finance through the use of convertible securities. In these schemes the debtor company sought to bring into account larger debits than the creditor’s credits as a result of the adopting of differing accounting methods in relation to the securities.
41.Sub-paragraph (2) substitutes a new section 418(1)(b). This replaces the existing Conditions A to C in section 418 with two new conditions A and B. Both conditions must be met (as well as the requirement in section 418(1) that debtor and creditor are connected) in order for the legislation to apply.
42.New subsection (2) specifies that Condition A. is that the rights under the loan relationship specified in section 418(1) include provision by virtue of which the creditor company is or may become entitled or be required to acquire (whether by conversion or otherwise) any shares in any company. This is similar to the language used in section 92 of the Finance Act (FA) 1996 before its repeal in 2005.
43.New subsection (3) specifies that Condition B is that the debits brought into account by the debtor under Part 5 of CTA in respect of the debtor relationship exceed the credits brought into account by the creditor as respects the creditor relationship when looked at for the corresponding accounting period. This test is carried out without reference to any credits the creditor may be required to bring into account under section 418.
44.The effect of new Conditions A and B is that section 418 now applies to all forms of intra-group convertible debt, not just those where the debtor divides the loan between debt and a derivative financial instrument/equity.
45.Paragraph 4 (4) inserts new subsections (6A) to (6C) into section 418.
46.New subsection (6A) provides that for the purposes of section 418 the creditor company is to be treated as party to a loan relationship notwithstanding that it has transferred those rights under a repo or stock loan (or where the transfer is by way of security under a mortgage within section 26 of the Taxation of Chargeable Gains Act 1992). This responds to avoidance disclosures that seek to disapply the legislation by means of such transactions.
47.New subsection (6B) provides that the creditor company is to be treated as remaining party to the relationship in any case not within subsection (6A) where the company disposes of the relationship with the “relevant avoidance intention”.
48.New subsection (6C) defines the relevant avoidance intention as the intention of eliminating or reducing the credits to be brought into account for the purposes of Part 7.
49.Paragraph 4(5) amends subsection (7) of section 418 so that section 418A (as well as section 418) supplements section 419.
50.Paragraph 4(7) introduces new section 418A into CTA. This section ensures that the amendments made to section 418 do not prevent that section applying clearly in cases where convertible debt is in accordance with GAAP treated as divided between a host contract and a derivative financial instrument or equity instrument.
51.New section 418A(1) provides that the section applies where the debtor or the creditor company in accordance with GAAP treats the rights and liabilities under the loan as divided between rights and liabilities under a loan relation (“ host contract”) and a derivative financial instrument or equity instrument.
52.New section 418A(2) provides that where the debtor treats the rights and liabilities under the loan relationship in accordance with subsection (1), section 418 shall apply as if the references in section 418(3)(a) to the loan relationship were to the host contract (that is, the part of the actual loan relationship that is treated by the debtor as a loan for accounting purposes).
53.New section 418A(3) provides that where the creditor treats the rights and liabilities under the loan relationship in accordance with subsection (1), section 418 shall apply as if the references in section 418(3)(b) to the loan relationship were to the host contract (that is, the part of the actual loan relationship that is treated by the creditor as a loan for accounting purposes).
54.Paragraph 4(8) provides that the amendments have effect for debits and credits arising on or after 22 April 2009.