CFM35810 – Corporate Finance Manual – HMRC Internal Manual

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CTA09/PT5/CH8

Overview

Under normal lending relationship rules, interest is exempt when accrued in accounts, not when paid.

This could lead to a mismatch if the borrower receives relief when the interest accrues, the interest is not paid for a certain period of time and the lender, not respecting the rules relating to the loan relationship, is taxed on interest only when received, or is outside the UK tax net entirely.

Related parties could arrange their affairs to take advantage of this mismatch. For this reason, the late interest rules delay relief for the borrower, in certain circumstances, when interest is paid late.

The rules have been significantly revised by FA15 to limit the categories in which late payment interest rules apply.

Current rules

The current rules on default interest apply in two categories of cases, when two other conditions are fulfilled.

The two cases are where interest is due from a debtor company when

The two conditions are that

  • Condition A – interest is not paid within 12 months of the end of the accounting period in which it accrues (CFM35830 explains what we mean by “paid”), and
  • Condition B – credits representing the full amount of interest are not taken into account in the loan relationship rules for any accounting period (CFM35840 explains what we mean by “taken into account”).

In this case, the borrower can only take the debit into account when he actually pays the interest.

The current rules apply to interest:

  • from December 3, 2014 for new loans contracted from that date, and
  • from January 1, 2016 for all loans contracted before December 3, 2014.

When a loan prior to December 3, 2014 has been substantially modified after December 3, 2014 and before January 1, 2016, the new rules take effect from the date of the modification.

For details on FA15 changes, see CFM35985.

old rules

Previously, the rules on default interest applied in four categories of cases, when conditions A and B, as set out above, are met.

All four cases concerned interest payable by a debtor company when

  • Debtor company and creditor company are related companies (S374)
  • The debtor is a close company and the creditor is a participant (S375)
  • Debtor and creditor companies have a major interest in each other (S377).
  • The creditor is an occupational pension scheme (S378).

The old rules applied to:

  • interest accrued before December 3, 2014, and
  • interest accrued between December 3, 2014 and December 31, 2014 for loans contracted before December 3, 2014.

When a pre-December 3, 2014 loan was substantially modified after December 3, 2014 and before January 1, 2016, the old rules only applied up to the time of the modification.

For details on FA15 changes, see CFM35985.

Lenders outside lending relationships

Generally speaking, the default interest rule applies when the lender does not comply with the rules relating to the loan relationship. It should be noted, however, that for accounting periods beginning on or after April 1, 2009, the scope of application of the rule on default interest is significantly modified as it concerns cases where the creditor is a company. See CFM35850.

Amounts disallowed subsequently written off

CTA09/S373 assumes that interest subject to the provisions of CTA09/PT5/CH8 does not accrue until paid. This processing replaces the actual debits or credits to the accounts. Applying this assumption, if amounts not permitted under these provisions are subsequently reversed (as they may be, for example in a debt/equity swap – see CFM33200), there is no relative debit to this interest to be canceled and no loan relationship credit occurs.

In this case, the borrower can only take the debit into account when he actually pays the interest.

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