CFM73160 – Corporate Finance Manual – HMRC Internal Manual


Deduction for financial expenses

The objective of the structured finance rules is to ensure the neutrality of the tax system between borrowing under a structured finance arrangement and other forms of borrowing. But the rules envisaged above would not alone achieve this result because, for there to be neutrality, the borrower would have to obtain a reduction in his financing costs. From the point of view of the legal form, the borrower is not party to a loan and does not pay interest, so it could be difficult for him to obtain relief for the financial charges which appear in its accounts and which correspond in substance to interests and possibly described as such in its accounts.

Sections 761 and 762 therefore deal with providing relief to the borrower for the finance cost element in the arrangement. Since the arrangement will involve the borrower paying more to the lender than he receives from the lender and this excess is in substance interest on the loan, the borrower will be entitled to relief for this excess to the extent that it is reflected in the accounts as a financial charge.

TIOPA10/SCH5/PARA2 treats borrowers who are persons subject to income tax and treats any amount recorded in the accounts as a finance charge as an amount of interest payable on a loan. Where the revenue that is temporarily alienated under the structured finance agreement is commercial revenue, interest will be part of the allowable deductions under ITTOIA05/PT2/CH3.

Section 761(3) deals with borrowers subject to corporation tax and in this case the advance under the arrangement is treated for the purposes of Part 6 LTC 2009 (lending relationships) as a debtor loan relationship. Any amount shown in the accounts as a finance charge is treated as interest payable under that relationship. Section 761(4) refers to this amount as “deemed interest”.

The relevance of treating finance charges as interest in a loan relationship is that the amount will be subject, where applicable, to the provisions of the loan relationship code that apply to interest, such as the rule of default interest (CFM35800) and unauthorized purposes (CFM38100) . In order to provide a rule as to when interest is paid, Section 761(4) treats payments received by the lender under structured finance agreements as being divided into principal and interest, the interest element of each payment being considered paid when the payment is received by the lender.

Section 762(3) provides that where relief is available for finance charges in the case of a partnership, references to accounts shall include the accounts of the partnership and amounts treated as interest shall be treated as interest payable by the partnership, even if reflected in the accounts of the individual partner. In the case of the company, this will mean that the provisions of CTA09/PT5/CH9 (CFM36000) apply to allocate the interest to the partners of the company in accordance with their shares and each partner will be subject to the provisions of part 6 with respect to this part. of interest.


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