Commentary

D5.127 Interest treated as a distribution—special securities (paragraph F)

Corporate tax
Corporate tax | Commentary

D5.127 Interest treated as a distribution—special securities (paragraph F)

Corporate tax | Commentary

D5.127 Interest treated as a distribution—special securities (paragraph F)

There are several types of distributions as detailed in D5.102 and in specific cases a payment described as interest may be treated as a distribution for tax. The specific situations detailed in the legislation are:

  1.  

    •     Distributions in respect of non-commercial securities (paragraph E) (see D5.1201, and

  2.  

    •     Distributions in respect of special securities (paragraph F), see below2

The effect of reclassifying interest as a distribution can make a difference to the tax treatment for the payer and the recipient. Interest paid by a company is generally allowable as a deduction under the loan relationship regime but a distribution is not an allowable deduction. Interest received by a company is taxable as a loan relationship credit, the receipt of a distribution by a company would normally be exempt but a distribution which represents recharacterised interest is not exempt from tax3.

Distributions in respect of special securities (paragraph F)

Any payment of interest or other distribution, out of the assets of the company, in respect of securities of the company which are special securities will be treated as a distribution apart from the amount that represents the principal secured or falls within distributions in respect of non-commercial securities (paragraph E)4 (D5.120).

The meaning of security is set out at 'Distributions—meaning of security' in D5.103 but the meaning of interest or other consideration given for the use of money advanced is extended to include such payments on advances where the security has not been 'issued'

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