CFM77630 – Corporate Finance Manual – HMRC Internal Manual

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Company A and company B are part of the same group. Company A issues a £100 million zero coupon bond to Company B which can be converted into ordinary shares of Company A.

Company A accounts for the obligation in accordance with FRS 102 and splits the obligation into an equity element valued at £10 million and a debt element of £90 million.

Company B also accounts using FRS 102, but because it is the holder of the financial asset it does not split the instrument for accounting purposes and so accounts for the debt element at £100 million. Company B would measure the instrument at fair value in its accounts. However, for tax purposes, Company B would be required to apply amortized cost accounting (see CFM35170).

Company A claims a finance charge of £10 million over the life of the bond while Company B provides no equivalent credit.

The scheme – previously covered by section CTA09/S418 – is a mismatch group scheme (GMS) because, at the time it was entered into, it was virtually certain to produce a relevant tax benefit. CTA09/S418 has been repealed with the introduction of GMS rules.

In this example, the relevant tax benefit would be the £10 million accrued by Company A over the life of the bond and it would be these debits that the GMS rules would act upon to disregard them.

If the convertible loan carried a low interest rate that Company A and Company B accounted for symmetrically (but Company A still claiming additional deductions), the interest debits would be part of a single finance charge , while credits would be Creditor’s CTA09/Part 5 Profits. Both amounts would be plan losses and profits and would also be ignored.

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