CFM33150 - Loan relations: core rules: direct in equity

CTA09/S321

This guidance is applicable for accounting periods beginning before 1 January 2016. F(No.2)A15 made a significant change in this area through the repeal of S321. This is explained in more detail below.

For an overview of the 2016 changes see {CFM33005}.

Amounts recognised in equity or shareholders’ funds

In some circumstances, a debit or credit relating to a loan relationship may be recognised in equity or shareholders’ funds, rather than in the profit and loss account,  income statement, the statement of total recognised gains and losses (STRGL) or statement of changes in equity (SOCIE).

This may happen if, for example, a company issues ‘perpetual debt’ - debt that gives the creditor no automatic right to repayment. If the terms of the debt are such that the debtor has no contractual obligation to hand over cash as a future date, it may be classified for accounting purposes as equity rather than a financial liability (see CFM21100). This means that, for accounting purposes, interest paid by the company will be treated as a dividend. For tax purposes, however, it is the legal form of the obligation that is important - the debt remains one representing a loan relationship, and the interest is still interest.

CTA09/S321 ensures that credits and debits that, in accordance with GAAP, are recognised in equity or shareholders’ funds are taken into account for loan relationships purposes. Thus, in the example above, the company would get relief for the interest it pays. But it must follow the accounting used, so that if interest is treated as a dividend and accounted for on a due and payable basis rather than being accrued, that treatment must be followed.

Accounting periods beginning on or after 1 January 2016

Section 321 has been repealed for loan relationships entered in an accounting period beginning on or after 1 January 2016.

However, the approach taken by S321 applies to later accounting periods in the following cases:

• Where a company entered into a loan relationship in an accounting period beginning before 1 January 2016 (F(No.2)A/SCH7/PARA106).
• Where a bank or insurer issues an instrument within the Regulatory Capital Security Regs (S.I. 2013 / 3209) (these regulations have been repealed with effect from 1 January 2019).
• Where a company is party to a loan relationship that is a 'hybrid capital instrument' (CTA09/S320B) (this rule has effect from 1 January 2019) - see CFM37800(link is external)

Note that for these later accounting periods, the S321 treatment only applies to amounts that are recognised directly in equity. It does not apply to amounts that are recognised as items of profit or loss or as items of other comprehensive income. It also does not apply to amounts of exchange gains or losses recognised in specified statements.