Commentary

D1.787 Loans for unallowable purposes

Corporate tax
Corporate tax | Commentary

D1.787 Loans for unallowable purposes

Corporate tax | Commentary

D1.787 Loans for unallowable purposes

Where, in an accounting period, a company's loan relationship has an unallowable purpose, the debits attributable to the unallowable purpose and any credits relating to exchange gains must be excluded from the loan relationship computation. Where the debits relate to more than one purpose, a just and reasonable apportionment is to be made1.

A loan relationship has an unallowable purpose in an accounting period if, at times during that period, the company is a party to it or has entered into a related transaction (see 'Related transactions' at D1.703) for an unallowable purpose2. The debits which might be affected are interest paid or accrued due, discounts, a decrease in the value under a fair value (previously, mark to market) basis of accounting, a bad debt provision, the release of a debt and a loss on disposal or surrender of a debt.

An unallowable purpose is one which is not among the business or other commercial purposes of the company. This is specifically made to include3:

  1.  

    •     a purpose in respect of which the company is not within the charge to corporation tax and

  2.  

    •     a tax avoidance purpose if that is the main purpose or one of the main purposes for which the party is a party to the loan relationship or enters into a related transaction

As regards the first bullet point, this would apply where the UK permanent establishment of a non-resident company obtains a loan to fund its overseas activities or if part of a

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