CFM33070 - Loan relationships: core rules: following the accounts
CTA09/S307, S308
The basic scope of the loan relationship rules is to include all profits and losses (including interest and certain qualifying expenses) from a company's loan relationships and related transactions (referred to as 'the matters'). The regime is based on the amounts recognised in the company's accounts.
General rule
The general rule is that the amounts to be brought into account under the loan relationship rules in respect of these matters are those that are recognised in determining the company's profit or loss for the period in accordance with generally accepted accounting practice [S307(2)].
The meaning of amounts recognised in "profit or loss" is expanded in S308. It is an amount that is recognised in a company's accounts for a period as an item of profit or loss.
In particular it will not include an amount recognised as an item of other comprehensive income (OCI), but specifically includes an amount previously recognised in OCI at a point where it is transferred to profit or loss.
This approach should align with amounts recognised in a company's 'income statement' or 'profit and loss account', where one is produced. Where a company prepares a single 'statement of comprehensive income' it will be necessary to identify the amounts of profit or loss, as opposed to amounts of other comprehensive income.
Other amounts in the accounts
In addition to the amounts recognised in profit or loss, the loan relationship rules also bring into account certain other amounts as if they were recognised in profit or loss. These are:
- amounts recognised in OCI which are not going to be recycled to profit or loss
- certain amounts recognised in the carry value of an asset or liability
- amounts recognised directly to equity for certain instruments
Non-GAAP compliant accounts
Where a company does not prepare GAAP-compliant accounts, the loan relationship rules operate on the basis that GAAP compliant accounts have been prepared. This can be particularly relevant for non-UK companies.
Exceptions
There are a number of statutory provisions, however, which alter the accounting treatment that is assumed to apply when applying the loan relationship rules. These include:
- where "amounts are not fully recognised for accounting purposes", an anti-avoidance rule may bring additional amounts into account (CFM39210)
- an amortised cost basis must normally be used for connected companies relationships (CFM35170)
- a company partner must apply a fair value basis of accounting to its share of a partnership's loan relationships, where it uses that basis in accounting for its interest in the partnership (CFM36030)
- fair value accounting must be used for index-linked gilt-edged securities (CFM37130)
- an amortised cost basis of accounting for discounts from relevant non-lending arrangements (CFM41000)
- fair value accounting must be used for interests in OEICs, unit trusts etc. (CFM43000)
In addition, the loan relationship rules contain further provisions that provide for certain statutory overlay to the accounting amounts to determine the amounts to be brought into account under the regime.
Pre-2016 position
F(2)A15 made a significant change to which amounts recognised in a company's accounts, in respect of the loan relationships matters, fall to be taken into account for tax, absent the application of special rules.
Before amendment, there was an expanded tax definition of an "amount taken into account in determining a company's profit or loss". In essence, this sought to bring in account all amounts recognised in a company's financial statements in respect of loan relationship, wherever they were recognised. Numerous, often complex, special tax rules then limited the effect of this expanded meaning.
CFM33160+ explains the pre-2016 rules in more detail.
Further guidance
CFM20000 - accounting for financial instruments
CFM33020 - the 'matters'
CFM33080 - companies without GAAP-compliant accounts
CFM33090 - non-UK resident companies
CFM33130 - amounts taken to carrying value of an asset or liability
CFM33140 - amounts in other comprehensive income (OCI)
CFM33150 - direct in equity
CFM33160 - pre-2016 rules
BIM31015 - meaning of 'generally accepted accounting practice'