CFM38155 - Loan relationships: tax avoidance: unallowable purpose: debits and exchange gains credits in relation to a loan relationship

CTA09/S441-442

The unallowable purpose rule (at S441-442) is not limited to loan relationship debits that relate to interest. Although much of this guidance, and in particular many of the examples, refer to debits that relate to interest for ease of drafting, the unallowable purpose rule can potentially apply to any debits, for instance, representing:

• accrued discount
• a decrease in the value taken into account under fair value accounting
• an exchange loss
• the creation or increase in an impairment loss
• the release of a debt
• a loss on ceasing to be party to a debt, whether by disposal or otherwise

The rule also applies not just to debits but also to credits on exchange gains where the loan relationship has an unallowable purpose (see CFM38510).

Given that the rule generally applies to counteract debits, the rule will normally be relevant to a debtor company. In some circumstances, however, a lending company is required by the accounting treatment to recognise accounting debits in respect of a loan relationship entered into by it, for instance in relation to impairment losses or exchange losses, in which case it may be necessary to consider the application of the rule.