CFM17005 - Artificial payments of interest: introduction

What is now ICTA88/S787 was introduced as FA76/S38 to counter schemes to exploit the provisions allowing relief for interest paid. It provides that no tax relief (see CFM17015) is to be given for artificial payments of interest. A number of schemes were successfully challenged by the Inland Revenue under the pre-existing statute and case law (see for example Cairns v MacDiarmid 56TC556) but FA76/S38 was enacted to put the matter beyond doubt. It only applies to cases involving ‘true interest'.

The legislation does not deny relief to those paying true interest for genuine business purposes where it is statutorily due. And it should usually only be invoked where substantial sums of money are involved. Inspectors should also bear in mind that a payment has to fulfil a number of other criteria. Thus, for example a sum claimed may not be true interest (see IM1500 onwards),

A further possibility is that artificially contrived arrangements may be counteracted by the application of the Ramsay doctrine. In such cases advice should be sought from Special Investigations Section.

ICTA88/S787 applies to all loan relationship debits in respect of interest, including payments of profit share return or alternative finance return under alternative finance arrangements – see CFM6050+. It also applies for income tax purposes to interest paid by non-corporates. Inspectors should also bear in mind that the loan relationships anti-avoidance provision in Paragraph 13 Schedule 9 Finance Act 1996 may also apply – see CFM6210+

For an example of the circumstances in which ICTA88/S787 might apply see Lancaster v CIR SpC 232.

Any case where there is doubt, or where the application of the Section is disputed, should be referred to Anti Avoidance Group (Investigation)..