CFM35175 – Corporate Finance Manual – HMRC Internal Manual



Tax asymmetries can arise in situations where a company borrows externally and then lends the funds raised to other companies in the group. CTA09/S349 requires that a loan relationship between related companies be taxed on the basis of amortized cost. If the related external lending relationship is accounted for at fair value, a tax mismatch would arise.

The internal lending relationship, even if potentially fair valued, would be taxed at amortized cost under CTA09/S349 (see CFM35030). If the external loan is accounted for at fair value, that loan relationship would be taxed on changes in fair value. This results in a tax asymmetry that can result in large taxable debits or credits that do not reflect the underlying economic reality, thereby creating tax volatility.

CTA09/S352B was introduced to solve this type of situation.


This section applies if all of the following conditions are met:

  • a company lends money under a loan relationship with a related company which is taxed on the basis of amortized cost under CTA09/S349 (the internal loan)
  • the enterprise borrows under a lending relationship that is accounted for on a fair value accounting basis and that is not a related enterprise relationship to which CTA09/S349 applies (external lending )
  • there is a qualified link between the external loan relationship and one or more internal loan relationships


When the conditions are met, the external lending relationship should be taxed on an amortized cost basis.

A qualified link appears if the capital raised is entirely or mainly used to finance loan relationships between related enterprises. HMRC accepts that which is entirely or mainly will depend on the circumstances.

When the financing structure of the group changes, it will be necessary to reassess whether there is a qualified link between the internal and external lending relationships. The company will have to demonstrate a qualified link between the funds obtained under the external instrument and the provision of funds under the internal instruments.

A company’s intention to undertake a financial transaction is expressed by the intentions of its directors, although in many cases decisions are delegated to a lower level of management. Particularly in larger companies, the board of directors (or group board) is likely to have set out a detailed policy on funding requirements. When the link between an external and internal financial transaction is evidenced by documents such as the detailed policy and this policy is implemented in practice, this should constitute sufficient proof of a “qualifying link”.

Fair value hedge

CTA09/S352B(4) applies when the external loan relationship is also subject to a hedging relationship against a derivative contract. This is not expected to be a common situation.

In these circumstances, when applying amortized cost accounting in accordance with paragraph 352B(3), it should be assumed that the hedging instrument has been designated for accounting purposes as a fair value hedge. In practice, this means that the book value of the loan relationship must be adjusted for changes in the fair value of the value of the risk covered.

Application to MREL instruments

CTA09/S352B is likely to be of particular relevance to banks which are required to issue MREL instruments,


The Bank of England directs a bank to issue an internal MREL (see glossary) with terms that give it, as resolution authority (see glossary), the right to release or convert the instrument. Under IFRS 9, these terms may require the instrument to be recognized at fair value. The intragroup instrument is financed by an instrument issued externally also recognized at fair value. Since the internal lending relationship would be taxed on an amortized cost basis, there is a tax asymmetry. The effect of the legislation is that both loan relationships will be taxed on an amortized cost basis.

Entry into force and transitional rules

CTA09/S352B applies to accounting periods beginning on or after January 1, 2019.

If a company has an accounting period that straddles this date, it must be split into two deemed separate accounting periods – one ending on December 31, 2018 and the other starting on January 1, 2019.

An adjustment may be necessary when a loan relationship comes into effect on January 1, 2019. The amount to be taken into account is the difference between the tax-adjusted book value of the instrument at the end of an accounting period ending on January 31, 2019. December 2018 and the tax-adjusted book value of this instrument at the beginning of the 2019 period.


Comments are closed.