CFM76048 - Other tax rules on corporate finance: change of accounting basis: TACV - other examples
CTA09/S465B and S702
When a company holds a loan or derivative where amounts are recognised in other comprehensive income (OCI), these amounts need to be adjusted for in calculating the tax-adjusted carrying value (TACV) of the loan or derivative in question. See CFM76045 for further details including examples.
There are a number of other tax rules that affect the timing of when amounts are recognised for tax purposes and which need to be adjusted in calculating the TACV of the loan relationship or derivative.
There are a number of other tax rules that affect the timing of when amounts are recognised for tax purposes and which need to be adjusted in calculating the TACV of the loan relationship or derivative.
Connected company loans
Connected company loans are required to be treated for tax purposes as being on an amortised cost basis of accounting, with no relief for impairment losses or release debits.
Special rules apply on a related transaction of a connected company debt, to ensure that this cannot be used to increase the debits or reduce the credits that are brought into account.
Example 1a: Intra-group convertible
ABC Ltd holds a convertible loan in another group company. The loan principal is £100,000. Under FRS102, ABC Ltd is required to measure the loan at its fair value. As a result, the accounting carrying value of the loan as at 31 December 2019 is £115,000.
Under CTA09/S349, the company is required to tax the loan on the basis of an amortised cost basis of accounting. The TACV of the loan as at 31 December 2019 will therefore be £100,000.
Example 1b: Impaired loan
EFG Ltd holds an ordinary loan receivable in another group company. The loan principal is £100,000. As the debtor company is unable to repay the full amount of the loan, the loan has been impaired by £40,000. The accounting carrying value is therefore £60,000. For tax purposes, EFG Ltd is not entitled to tax relief for the impairment loss (S354) and the TACV remains £100,000.
Intra-group transfers
CTA09/S340 applies a group continuity rule where loans are transferred between two group companies. CTA09/SS625 applies an equivalent rule for the intra-group transfer of derivative contracts.
The group continuity rule uses the concept of TACV to determine the value at which the loan or derivative should be transferred. It will also affect the TACV for future periods.
Example
A company holds a fixed rate bond that has been issued by a third party. The accounting carrying value of the loan is £30,000, being its amortised cost value. Due to a reduction in market interest rates, the fair value of the loan has risen to £40,000.
The bond is transferred to another group company for its fair value of £40,000. For tax purposes, the transfer is treated as taking place at the TACV of the loan immediately before the transfer, which is £30,000.
Following the transfer, the TACV will remain at £30,000 to take account of the application of S340, even though the accounting carrying value will now be £40,000.
Late interest
CTA09/PT5/CH8 applies to defer tax relief for late interest on certain loans until the interest is paid. Similar rules apply to certain deeply discounted securities where tax relief for the discount is deferred until the instrument is redeemed.
Example
XYZ Ltd, a close company, has borrowed £100m under loan to a UK resident individual who is a participator in the company. Interest at 6% per year is accrued but not paid. Tax relief for the interest is deferred until the interest is paid.
Ordinarily, the accrued interest would be included in the TACV. However, in this case tax relief has been deferred. As such, the TACV of the loan needs to be adjusted to reflect that tax relief will be available in the future at the point the interest is paid. As such, the TACV of the loan is £100m.
Substantial modification of distressed debt
CTA09/S323A applies to exclude credits from being brought into account from the substantial modification of distressed debt where certain conditions are satisfied. Debits representing the reversal of such amounts are also not brought into account under the loan relationship rules.
Example
A bank advances a £1,000,000 loan to a third party company debtor. Due to significant financial difficulties experienced by the debtor company, the lender agrees to amend the terms of the loan, by reducing the interest rate and extending the repayment date.
The debtor’s accountants concluded that these changes amount to a substantial modification, with the consequence that the whole loan needs to be derecognised and rerecognised at its fair value of £550,000. A credit of £450,000 is recognised in the debtor’s accounts as a result of the restructuring. It is concluded that S323A applies so that this credit is not brought into account under the loan relationship rules.
S323A needs to be taken into account in determining the TACV of the loan in the debtor’s Corporation Tax computations. As a result, the TACV of this loan remains at £1,000,000, despite the accounting value having been reduced.
Further guidance
Further guidance on the calculation of the TACV: