CFM35170 - Loan relationships: connected companies: use of the amortised cost basis
Connected companies must use the amortised cost basis
CTA09/S349
The basic rule is that connected companies must use the amortised cost basis of accounting in computing loan relationships profits and losses. Companies that use fair value accounting must therefore make adjustments in their tax computations.
Change to amortised cost basis
Where companies begin to be, or cease to be, connected, and the company moves from fair value to amortised cost as the basis used for determining loan relationships profits and losses as a consequence, or vice versa, it is necessary to bring into account an adjustment to ensure that no amounts fall out of account, or are counted twice.
Since 2016 this is done by the change of accounting basis rules, based on any increase or decrease in the tax-adjusted carrying value (TACV) of the loan.
Example
H plc is the holding company of a trading group. It grants a franchise to a US company to trade under the ‘H’ name, and also holds interest-bearing loan notes issued by the US company. The notes, with a face value of $2 million, were issued at a discount. H plc accounts for the notes as an available for sale asset.
In year ended 31 December 2023, H plc acquires 90% of the shares in the US company, and therefore becomes connected.
The value of the loan notes at 31 December 2022 and 31 December 2023 is as follows:
| Date | Carrying value - amortised cost basis | Exchange rate (£/$) | Amortised cost basis - sterling equivalent | Fair value |
|---|---|---|---|---|
| 31 Dec 2022 | $1,900,000 | 1.7000 | £1,117,647 | £1,130,000 |
| 31 Dec 2023 | $1,950,000 | 1.7200 | £1,133,720 | £1,140,000 |
At 31 December 2022, the closing fair value is £1,130,000 - this is TACV at the end of the earlier period.
The opening value on an amortised cost basis in the period during which the connection starts is £1,117,647. This is the TACV at the start of the later period.
The difference between these, £12,353, is brought in as a loan relationships debit in the year ended 31 December 2023.
The tax computations for year ended 31 December 2023 will be on an amortised cost basis. They will show a credit of £16,073 (£1,133,720 - £1,117,647). The taxable amount, net of the S316 debit, is therefore £3,720 (plus the interest credits).
Pre-2016 rules
For accounting periods that commenced before 1 January 2016, there were specific rules for dealing with companies beginning or ceasing to apply amortised cost basis of accounting as a result of being a connected company:
- CTA09/S350 applied where companies became connected.
- CTA09/S351 applied where companies ceased to be connected.
Those rules had a similar effect to that now achieved by the change of accounting basis rules.