Commentary

A1.302 Arrangements giving rise to alternative finance return

Administration and compliance

A1.302 Arrangements giving rise to alternative finance return

A1.302 Arrangements giving rise to alternative finance return

Alternative finance return

The legislation addresses three contracts that give rise to alternative finance return.

Purchase and re-sale

A finance arrangement can, as an alternative to payment of interest, be structured as a purchase of an asset and its onward sale at a higher deferred price. This is illustrated in the following diagram, where the customer obtains the equivalent of a 24-month loan with all interest being paid on the repayment of the loan.

Under existing legislation, that would probably give rise to chargeable gains, although this in turn can depend on the nature of the asset. The provisions described here1 define the circumstances in which such a structure is now to be taxed in the same way as if the return were a payment of interest. The difference between purchase price and sale price is treated as a 'finance return'.

The following four conditions must be present for an arrangement involving a purchase and sale of an asset to fall within the provisions described here2:

  1.  

    (a)     a person ('X') purchases an asset and sells it, either immediately or in circumstances in which the conditions described below are met, to the other person ('Y')

  2.  

    (b)     the amount payable by Y in respect of the sale is more than the amount paid by X in respect of the purchase

  3.  

    (c)     all or part of the sale price is deferred beyond the date of the sale; and

  4.  

    (d)     the difference between the sale and purchase prices equates,

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