Connected party relationships ― late interest

By Tolley

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

  • Connected party relationships ― late interest
  • Repeal of late interest rules
  • Overview of rules
  • Loans entered into on or after 3 December 2014 (or where interest accrues on earlier loans from 1 January 2016)
  • Finance Act 2015 changes
  • Accounting periods beginning on or after 1 April 2009
  • Interaction with debt cap rules and corporate interest restriction rules

Repeal of late interest rules

The majority of the late interest rules described below were repealed by Finance Act 2015. Only the rules applicable to loans to close companies by participators (see CTA 2009, s 375) and loans by trustees of occupational pension schemes (see CTA 2009, s 378) survive. However, the repeal only applies for new loans entered into on or after 3 December 2014. For loans entered into before this date, the repeal has effect for interest accruing on or after 1 January 2016. It should be noted that the late interest rules still apply to interest accruing on specified connected party loans between 3 December 2014 and 31 December 2015. The legislation and repeals are set out in detail below.

Overview of rules

Generally, debits and credits arising on loan relationships are taxed and relieved as they are recognised in the accounts, ie generally on an accruals basis. However, in certain circumstances where interest on a loan relationship is not paid within 12 months of the end of the accounting period in which it accrues, no relief is given for corporation tax purposes until it has actually been paid. These provisions are known as the ‘late interest’ rules and can be found in CTA 2009, ss 372–379 (Pt 5, Ch 8).

The late interest legislation is essentially a set of anti-avoidance measures. It seeks to prevent companies from taking advantage of an interest mismatch that would otherwise arise if the borrower obtained relief for accrued interest which is not paid for some time, and the lender is outside the loan relationship rules (or is completely outside the UK tax net) and only taxed on that interest when it is received.

It is important to note that this anti-avoidance measure only applies to interest, and not to other charges and financing costs which may

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