CFM38165 - Loan relationships: tax avoidance: unallowable purpose: interaction with other regimes

CTA09/S441(4)-(5)

Where the unallowable purpose rule (at S441-442) has the effect that an amount of debits (or exchange gains credits) is not taken into account, S441(4)-(5) provide that the amount is treated as dealt with under the loan relationship regime. As set out in CFM30130, CTA09/S464 provides that, subject to any express provision to the contrary, the amounts which are brought into account in respect of a loan relationship in accordance with CTA09/PT5 are the only amounts to be brought into account in respect of it for Corporation Tax purposes. The loan relationship regime, therefore, forms an exclusive code on the taxation of corporate finance, and amounts dealt with under the regime cannot be taxed or relieved under other tax rules, in accordance with the priority rules in CTA09/S464 (CFM30130). This means the amount not taken into account by virtue of the unallowable purpose rule cannot then be brought into account for Corporation Tax purposes under any other tax rules.

There is further discussion of the interaction of the unallowable purpose rule with the transfer pricing rules at CFM38450, with the hybrids rules at INTM550080, and with the Corporate Interest Restriction (CIR) rules at CFM99300. In some situations, when an accounting period is first considered by HMRC, it may be clear that the impact of CIR will be such that debits potentially subject to challenge under other rules such as the unallowable purpose rule would in any event be disallowed under CIR. Accordingly, the potential application of such rules may not be enquired into by HMRC at that time as it is not an appropriate use of resources (and, even taking into account earlier certainty, it may not be the taxpayer’s preferred use of their resources either). Circumstances may change so that there is an increased likelihood of reactivating amounts sought to be carried forward. If so, it may be necessary to re-examine the deductibility of such amounts, including whether the unallowable purpose rule applies, for the initial or later periods, in accordance with usual principles and subject to usual time limits.

The interaction of the unallowable purpose rule and the regime anti-avoidance rule (CFM39500), which both sit within the loan relationships rules, is discussed at CFM39570.