What is meant by a loan relationship ― practical approach

Produced by Tolley

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

  • What is meant by a loan relationship ― practical approach
  • Brief overview of the rules
  • Whether the debt is a loan relationship ― practical approach
  • What is meant by a loan relationship ― illustrative scenarios
  • Illustration 1 ― relevant non-lending relationships
  • Illustration 2 ― payments made under a guarantee

What is meant by a loan relationship ― practical approach

Brief overview of the rules

The loan relationships legislation applies to any ‘money debt’ arising from the lending of money entered into by a company, either as a lender or borrower. The rules are contained in CTA 2009, ss 292–569 (Parts 5 and 6).

Broadly, the tax treatment of loan relationship-related debits and credits is based on the amounts reflected in profit and loss in the company’s accounts (under GAAP), with debits generally being allowable and credits being taxable. However, there are a number of exceptions to this general rule. One of the most important exceptions is where the relevant loan relationship is between 'connected companies'. For connected companies, any loan relationship debits are generally not allowable and any loan relationship credits are treated as not taxable. Connected companies are also prevented from using fair value accounting and must use amortised cost basis accounting for their loan relationships.

Typically, the tax analysis would first involve assessing whether the debt actually constitutes a loan relationship. In some situations, this will be obvious (for example, a normal loan evidenced by a loan agreement), but in other cases, the analysis is more involved. Once it is established that the debt is within the scope of the loan relationship rules, it is then necessary to consider if the companies are connected and what this means in terms of the tax treatment.

This guidance note provides a practical approach to tackling the legislation in relation to the first step. For the second step on the rules for connected companies, see the What are connected companies for loan relationship purposes ― practical approach guidance note

Outlined below is a suggested approach for tax advisers (both in-house and in practice) on how to determine whether a particular debt falls within the scope of the loan relationship regime. An explanation of the relevant consideration at each stage is provided, together with practical points to be aware of and

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