Debt Instruments and the loan relationship rules

1. Specific Provisions relating to inter-company loans

1.1. Requirement to use amortised cost

1.2. Impairment of inter-company debt

1.2.1. Simplifying a group structure

1.3. Anti-avoidance rules where a debt is impaired

1.4. Inter-company convertibles – anti-avoidance

1.5. Companies ceasing to be connected after an inter-company debt has been impaired

1.6. General anti-avoidance rules

2. Taxation of debt instruments under fair value through profit and loss (FVTPL)

2.1. Relatively infrequently encountered

2.2. Third-party debt - tax follows accounts

2.3. Related party - for tax must adjust to amortised cost

3. Obtaining tax relief for debits arising on loans

3.1. Trading debits

3.2. Non-trading debits

3.2.1. Amounts are per accounts

3.2.2. Relieved under specific rules

4. Taxation of Liabilities accounted for at amortised cost

4.1. Overdrafts, bank loans, arms-length inter-company loans

4.2. A debtor relationship

4.3. Amounts for tax, usually debits, follow accounts

4.3.1. Amounts computed using effective interest rate

4.3.2. Cash amounts and accounts debits usually differ

4.4. Trading and non-trading amounts

5. Taxation of Assets accounted for at amortised cost

5.1. Deposits, Loans to subsidiaries at arms-length etc

5.2. A creditor relationship

5.3. Amounts for tax, usually credits, follow accounts

5.3.1. Amounts computed using effective interest rate

5.3.2. Cash amounts and accounts credits usually differ

5.4. Trading and non-trading amounts

6. Key Concepts

6.1. Tax generally follows the accounts

6.2. There are differences in approach between tax and accounting

6.3. Loan relationships widely defined

6.4. Simple trade debts excluded

6.4.1. Extended time to pay may bring inside rules

7. Loan Relationships – Foreign Exchange gains and losses

7.1. FX gains and losses are loan relationship credits and debits

7.2. Specific anti-avoidance rules

8. Anti-avoidance provisions

8.1. Unallowable purpose

8.2. Regime wide provisions

8.3. Specific rules

9. Capitalised Debits and Credits

10. Costs related to financing transactions

10.1. Generally deducted in line with accounts

10.2. Acquisition related costs may be restricted

11. Equity investments accounted for as financial instruments are not loan relationships

11.1. Exception - some preference share investments are treated as loan relationships

12. Cross-Border Matters

12.1. The impact of the OECD BEPS Project

12.1.1. Anti-hybrid rules

12.1.2. Transfer pricing

12.1.2.1. Delineating the transaction

12.1.2.2. Potential re-characterisation as equity

12.1.3. Corporate interest restriction

12.1.3.1. Net interest expense above £2m

12.1.3.2. Fixed ratio - 30% of EBITDA

12.1.3.3. Group ratio

12.1.3.4. Debt cap

12.1.3.5. Public infrastructure exemption

12.1.3.6. Allocation to entities