BN 06: Alternative Finance Arrangements

Who is likely to be affected?

1. Individuals and companies wishing to invest or borrow under alternative finance arrangements that do not involve the receipt or payment of interest.

2. Banks, building societies and similar financial institutions offering alternative finance products.

General description of the measure

3. The measure;

  • provides for two additional financial arrangements that replicate the effect of investments or loans at interest, ensuring that they are taxed no more or less favourably than equivalent arrangements that do give
    rise to interest;
  • provides for low-cost alternative finance arrangements by employers to employees to be taxed in the same way as equivalent loans that give rise to interest, and
  • allows other similar arrangements, which equate in substance to a loan or deposit but do not give rise to the payment or receipt of interest, to be brought into the existing legislation by Treasury Order.

4. These changes further facilitate the use of alternative financial products including, for example, those developed to be Shari’a compliant.

Operative date

5. The provision relating to alternative finance arrangements made available to employees will apply to arrangements entered into on or after 22 March 2006. The remaining provisions apply to arrangements entered into on or after 6 April 2006 for income tax purposes and 1 April 2006 for corporation tax purposes.

Current law and proposed revisions

6. Finance Act 2005 (FA 2005) introduced legislation to deal with finance arrangements that are structured so that they do not involve the payment or receipt of interest. It enabled certain financial arrangements to be taxed in a manner similar to those involving interest. It also ensured that other rules relating to interest, such as deduction of tax at source, apply in the same way.

7. The new provisions build on FA 2005 by providing for two additional alternative finance arrangements to be taxed on a level playing field to products involving interest. These relate to an agency-style contract, which is equivalent to a saving account, and a partnership-style arrangement used to finance the purchase of property or other assets.

8. This is achieved by providing that, where certain conditions are met, amounts equating economically to interest that are paid by the financial institution to the investor or received by the financial institution are to be charged to tax on the same basis as interest.

9. The proposed revision also amends FA 2005 to provide that low cost alternative finance arrangements provided by employers to employees are treated in the same way as conventional low-interest loans to employees. Existing legislation provides that a taxable benefit-in-kind arises from a ‘taxable cheap loan’ made to an employee. The difference between the amount of interest actually payable, and the amount of interest that would be payable at the official rate, represents the taxable benefit.

10. It is unclear whether the existing legislation includes alternative finance arrangements. The proposed revision puts it beyond doubt that benefits under such arrangements will be taxed on a par with conventional loans.

Further advice

11. A draft of the clauses that are proposed to be included in the Finance Bill is today published. Comments on the draft are welcome, and should be submitted by e-mail to:

12. If you have any questions about this change, please contact Sue Davies on 020 7147 2565 or Lesley Hamilton on 020 7147 2564. Information about Budget measures is now available.

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