Loan relationships ― scope and definitions

By Tolley
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The following Corporation Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Loan relationships ― scope and definitions
  • Definition of loan relationship
  • What constitutes a debt?
  • Definition of money debt
  • Transaction for the lending of money
  • Relationships treated as loan relationships
  • Relevant non-lending relationships
  • Other measures

This note provides guidance on the definition of a ‘loan relationship’. It also describes the situations where loan relationships are deemed to exist even though the strict definition for one has not been met.

 

This note provides guidance on the definition of a ‘loan relationship’. It also describes the situations where loan relationships are deemed to exist even though the strict definition for one has not been met.

HMRC’s Corporate Finance Manual contains detailed guidance on its interpretation of these rules at CFM31000 onwards. This note does not reiterate that guidance but summarises the key concepts.

A flowchart outlining the scope of the loan relationships regime can be found at Flowchart ― tax treatment of loan relationships.

Definition of loan relationship

CTA 2009, s 302 states that a company has a loan relationship if:

  • the company stands in the position of a creditor or debtor as respects to any money debt (whether by reference to a security or otherwise, ie whether the debt is secured or unsecured)
  • the debt arises from a transaction for the lending of money

For a loan relationship to exist, this core definition must be met. However, certain terms are expanded below.

It is important to note that if a company is owed money, it stands in the position of creditor and has a ‘creditor relationship’. Conversely, if the company owes money, it stands in the position of debtor and has a ‘debtor relationship’. Essentially, lender / investor / holder of debt has an asset on its balance sheet = ‘creditor relationship’; and borrower / issuer of debt has a liability on the balance sheet‘ = ‘debtor relationship’. This is opposite to conventional accounting terminology.

What constitutes a debt?

The term debt is to be taken from general corporate law. If the creditor has no legal right to the consideration, there is no debt.

Debt v equity

The general

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