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View the related Tax Guidance about Loan relationships

Corporate debt ― overview

Corporate debt ― overviewThis guidance note provides an introduction to the provisions governing the taxation of debt for UK companies and also provides links to more detailed guidance notes dealing with those provisions.The taxation of corporate debt in the UK is complex. There are several different sets of rules governing the amount and timing of tax deductions available for interest and other amounts relating to corporate debt. These include:•the loan relationships regime•the corporate interest restriction (CIR) rules•transfer pricing and thin capitalisation requirements•a range of associated anti-avoidance measures ― it should be noted that there are regime anti-avoidance rules (RAARs) in CTA 2009, ss 455B–455D and related sections for loan relationships and in TIOPA 2010, s 461 applicable to the CIRIt should also be remembered that payments of interest by a UK company on all liabilities capable of remaining outstanding for more than one year are subject to withholding tax, unless they are expressly exempt or qualify for relief.Loan relationshipsIn most instances, a company’s financing costs and income are taxed or relieved under the loan relationships regime. Relief is only available where the cost attaches to the company’s own loan relationships or a balance which is deemed to be a loan relationship for tax purposes. See the What is a loan relationship? guidance note.A loan relationship exists where a company stands in the position of debtor or creditor in respect of a money debt that arises from a transaction for the lending of money. Although, it

First time adoption of IFRS 15 ― revenue from contracts with customers

First time adoption of IFRS 15 ― revenue from contracts with customersIntroductionThe adoption of new accounting standards commonly results in transitional tax adjustments for corporation tax purposes. This happens because the cumulative amount of income or expense recognised on the new basis as at the start of the year of adoption usually differs from the old basis.In addition, there are usually deferred tax implications at the point of transition as a consequence of ‘catch-up’ adjustments taken to reserves on adoption of the new standard. Where the income of the comparative period is altered, then a deferred tax adjustment to that period is usually required although corporation tax for that year will remain undisturbed assuming the financial statements were prepared in accordance with the valid generally accepted accounting principles (GAAP) of that previous period. If the tax rules going forward mirror the accounting entries, then there will be no deferred tax balances at the end of the year of adoption of the new standard.This guidance note explores these issues in the context of IFRS 15.The introduction of IFRS 15, which was mandatory for accounting periods beginning from 1 January 2018, provides a comprehensive source of guidance on revenue recognition for all IFRS users. Previous guidance was limited to a fairly narrow range of situations and allowed users to interpret GAAP with varying degrees of conservatism, resulting in a range of different accounting outcomes. IFRS 15 should narrow this historic diversity by providing a combination of clear principles and detailed guidance

Restriction on non-trading losses on change in ownership

Restriction on non-trading losses on change in ownershipThis guidance note provides details of the potential restriction that may arise in respect of certain losses on a change in ownership of a company with investment business. The restrictions are very similar to those which apply in respect of trading losses. See the Trading losses and anti-avoidance guidance note for more information.There are various conditions relating to the change in ownership of an investment company which, if met, will result in potential restrictions to the excess management expenses, qualifying charitable donations and non-trading losses that have arisen prior to the change. The purpose of this legislation is to ensure that companies are not ‘traded’ just so a tax advantage can be obtained, such as accessing a company’s tax losses. Please refer to the following guidance notes for general details about the utilisation of these types of losses:•Excess management expenses•Non-trading deficits on loan relationships•Losses on non-trade intangibles•Property business losses for companiesThe conditions which lead to the potential restrictions under the rules in CTA 2010, Pt 14, Ch 3 (CTA 2010, ss 677–691) are that there is a change in ownership (see below) of a company with an investment business and one of the following applies:A)after the change in ownership there is a significant increase in the amount of the company’s capital (discussed in more detail below)B)within the eight-year period beginning three years before the change in ownership there is a major change in the nature or

Allowable expenses for property businesses

Allowable expenses for property businessesThis guidance note applies to companies and individuals with commercial or residential properties and shows the contrasts in treatment between the corporate and individual tax regimes.General itemsMany of the principles applying to allowable expenses for property businesses are similar to those that apply for trading and the rules for individuals in a property business are generally the same as for companies with some exceptions which are highlighted in the detailed sections below. One notable difference in allowable property expenses between individuals and companies is the treatment of interest expenses. Details of the rules for income tax purposes are included in the Deduction of interest against property income ― income tax rules guidance note and the corporation tax rules are set out in the Taxation of loan relationships guidance note.Note that of the fixed rate deductions for expenses available for the self-employed carrying on trades, professions and vocations, only the fixed rate deductions for business mileage applies to those carrying on a property business. See ‘Travelling costs’ below. This is because the rules in ITTOIA 2005, ss 94H, 94I (deductions for the use of home for business purposes and premises used both as a home and business premises) are not included in the list of provisions that apply to profits of a property business by virtue of ITTOIA 2005, ss 272, 272ZA.The rule that expenditure must be ‘wholly and exclusively’ for the business applies. For more information, see the Wholly and exclusively guidance note. This guidance

Inbound migration

Inbound migrationReasons for an inbound migrationMigration describes the situation when a company changes its tax residence. A company which is not incorporated in the UK may become resident for tax purposes in the UK if it becomes centrally managed and controlled in the UK.The Government is currently consulting on whether or not to introduce a corporate re-domiciliation regime. The consultation closed on 7 January 2022 and the response is expected to be published by HMRC in due course.See the Residence of companies guidance note.In many cases, this may happen accidentally, but a well-advised company will avoid this by taking appropriate action to ensure that central management and control is kept outside the UK.However, in some cases, there may be tax benefits of a company becoming resident in the UK, for example:•to take advantage of a UK double tax treaty•to avoid the application of anti-avoidance rules such as the attribution of gains under TCGA 1992, s 3 (formerly TCGA 1992, s 13) ― see the Gains attributable to participators in non-UK resident companies guidance note ― or the transfer of assets abroad rules, see Example 1•to qualify under the subsidiary substantial shareholding exemption (TCGA 1992, Sch 7AC, para 3, which requires the investing company to be resident in the UK), see the Substantial shareholding exemption (SSE) ― overview guidance note which also sets out legislative changes in this area applicable from 1 April 2017

Calculating relevant IP profits ― new entrants and 1 July 2021 onwards

Calculating relevant IP profits ― new entrants and 1 July 2021 onwardsChanges to relevant IP profits calculationsNumerous modifications were made to the way in which the patent box calculations could be performed with effect for accounting periods beginning on or after 1 July 2016. The commentary in this guidance note applies to the calculation of relevant IP profits of a company:•that is a ‘new entrant’, ie its first patent box election, or its most recent election, takes effect on or after 1 July 2016, or•where the accounting period begins on or after 1 July 2021CTA 2010, s 357AAccounting periods which straddle these dates are split into two notional periods and profits and losses are apportioned between them on a just and reasonable basis. The calculation now requires streaming of profits by reference to each IP right, with relevant R&D expenditure directly linked and allocated to the patent or patented item. As a result, the amount of profit that can qualify for the lower effective rate of tax applicable under the patent box regime depends upon the proportion of development expenditure that has been incurred by the company. A greater level of detail is now needed as the calculations require the allocation of income and expenditure to each sub-stream, which must be supported with evidence. HMRC expects that companies must be able to demonstrate the methodology by which R&D expenditure is allocated to individual sub-streams, at least in the first such period of calculation. Any significant adjustments to

Summary of reliefs for company losses

Summary of reliefs for company lossesA company may incur any of the following losses:•trading losses•non-trading loan relationship losses•non-trading losses on intangible fixed assets•property lossesThese losses are generally able to be offset against certain profits either in the year the loss was incurred, previous or future years. The rules governing such offset are similar for each loss source but there are nuances and claim requirements that differ depending upon the source of the loss.From 1 April 2017, the loss carry forward rules were relaxed to allow carried forward losses to be offset against future total profits of a company. Prior to 1 April 2017, many losses brought forward had to be streamed in that if they were trading losses, they could only be set against future trading profits, etc. The reforms have resulted in two sets of rules that govern the use of carried forward losses ― one for losses arising prior to 1 April 2017 and one for losses arising on or

Group relief for carried-forward losses

Group relief for carried-forward lossesThis guidance note examines in detail the relief available to groups for carried-forward losses. The scope excludes the treatment of specialist businesses such as banks, insurance companies and oil and gas companies.From 1 April 2017, companies can surrender certain types of carried-forward losses to another company in the same group relief group. The rules are subject to several conditions and numerous anti-avoidance provisions, which are discussed below.Prior to 1 April 2017, it was not possible to surrender brought forward losses of any description against profits of any other companies within the group relief group. This meant that certain types of losses could be ‘trapped’ within individual legal entities with little or no prospect of relief, particularly in cases where the company was not expected to make profits in the future against which the losses could be relieved.Development of the UK legislationThe legislation was introduced by F(No 2)A 2017, Sch 4, para 23 and applies generally from 1 April 2017. For the anti-avoidance rules, see below.Draft guidance on the loss relief commencement provisions was issued by HMRC on 7 December 2017.More detailed HMRC guidance on group relief for carried forward losses can be found at CTM82000 onwards.Accounting periods straddling 1 April 2017Where a company’s accounting period straddles 1 April 2017, the periods before and after 1 April 2017 are treated as two separate accounting periods. Profits / losses are time apportioned or, where that would produce an unreasonable result, apportioned on a just and reasonable basis.

Property investment or trading?

Property investment or trading?Outline of property investment vs tradingThis guidance note applies to both individuals and companies.The distinction between income and capital profits is crucial to many areas of tax law and is a common issue for property transactions. Often it will be quite clear cut as to whether the activity is trading or investing in land. A person buying property to let out long term will be making a property investment, whereas someone buying a property to refurbish and sell (’flipping’) will most likely be trading as a property dealer or property developer. However, where is the line to be drawn between activity regarded as dealing and activity regarded as investment?First, it is important to realise that the tests for whether one is dealing in property or making a property investment are the same as for any other trade. Therefore, a good place to start is to look at the ‘badges of trade’ and considerations will include:•profit seeking motive•frequency and number of similar transactions•modification of the asset in order to make it more saleable•nature of the asset•connection with an existing trade•financing arrangements•length of ownership•the existence of a sales organisation•the reason for the acquisition or saleThe badges of trade are not a statutory concept but are a recognised set of criteria developed by the courts to identify when a person is undertaking a trading activity. They can be applied to property transactions just as they can to a variety of

Transfer pricing and financing arrangements

Transfer pricing and financing arrangementsTransfer pricing rules also apply to financing arrangements. Loans between connected companies where one of those companies controls the other, or where both are under common control, are subject to the regime. The transfer pricing legislation takes precedence over the loan relationships legislation and the rules on the corporate interest restriction. See the Corporate interest restriction ― overview guidance note. The same principles of transfer pricing as set out in the UK transfer pricing in practice guidance note apply to financing transactions. Additional details and examples are provided in the OECD’s Transfer Pricing Guidance on Financial Transactions which have become part of the main OECD Transfer Pricing Guidelines republished in 2022.One important aspect of transfer pricing for loans is thin capitalisation, ie a company does not have enough capital to support the debt. A company will be considered to be thinly capitalised where:•a loan exceeds the amount which the borrower would or could have borrowed from an independent lender, or•the terms of the loan differ from those that would have been agreed with such a lender, eg a higher interest rateTIOPA 2010, s 152; INTM413200Where thin capitalisation occurs, the interest on the excessive part of the loan will be disallowed as a deduction in arriving at the assessable profits or allowable losses of the borrower. This is on the basis that the borrower would not have had a deduction for that amount if the loan had been arranged with a third party. See