CFM38420 - Market value rule: exceptions

Where the market value rule does not apply

There are a number of exceptions to the market value rule in CTA09/S444.

(1) Transactions within the scope of TIOPA2010/Part 4

CTA09/S445 disapplies S444 where a related transaction falls to be adjusted for tax purposes under the transfer pricing rules (TIOPA2010/Part 4), whether or not there is an actual adjustment under those provisions.

So, in particular, CTA09/S444 will not apply where:

  • The transaction falls to be adjusted under the transfer pricing rules.
  • The transaction falls within the scope of the transfer pricing rules, but no transfer pricing adjustment is required because the related transaction is on an arm’s length basis.

See CFM38440 for how the transfer pricing rules apply to loan relationships.

(2) Initial setting up of a loan relationship

The various categories of related transaction do not include the initial setting up of a loan relationship. So, even if a company enters into a loan relationship on uncommercial terms, such as an interest rate below market value, S444 cannot apply to make an adjustment. Instead you need to consider the transfer pricing rules in TIOPA2010/Part 4.

(3) Acquiring a loan relationship at less than market value

CTA09/S444(4) provides that the S444(1) adjustment does not apply to debits arising

  • from the purchase of a loan relationship
  • at less than market value.

Although this rule is primarily aimed at cases where the vendor is not within the charge to corporation tax, it does apply in other cases too.

So, when a company buys a debt at undervalue (not at arm’s length), there is no adjustment to its accounts; it brings in the lower value and is taxed on the full amount of any resulting profit. S444(1) does apply to the vendor, however - where it sells a debt at undervalue (not at arm’s length) it is taxed as if it had sold the loan relationship at the market value.

(4) Groups

CTA09/S444 does not apply to:

  • related transactions between companies that are members of the same group, and chargeable to corporation tax, or
  • transactions that are part of a series of transactions, such as back to back loans, that have the same effect as transactions between group members

where the continuity of treatment rules for groups apply or would apply but for the fact that the transferor already uses fair value accounting

(5) Forex gains and losses

Exchange gains or losses are not adjusted - S444(6). There are separate provisions for non-arm’s length transaction involving exchange gains or losses.