CFM6250 - Taxing Loan relationships: anti-avoidance: reset bonds: introduction and contents

Overview

For accounting periods starting on or after 1 January 2005, references to an “authorised accruals basis” should be read as “amortised cost basis”

FA96/S88A stops particular marketed avoidance schemes that use bonds. Bonds caught by S88A have been termed 'reset' bonds. Such bonds start on normal market terms. Shortly afterwards, an external event triggers a significant change to the original issue terms, such as changes in interest rate. This materially affects the value of the bonds, either decreasing or increasing their value.

An investor is gambling on whether the return will be substantially above or below current market rates. No ordinary investor would enter into such uncertain arrangements on a commercial basis, so there are likely to be other reasons for the bonds' issue.

Tax advantage

Companies using the authorised accruals basis of accounting (see CFM5105) use these bonds in different ways to obtain a tax advantage. For example, they can be used to

• convert income to capital
• enable a profitable group to share relief for another group's tax losses.

Effect of S88A

When S88A applies, the company must account for the bond on a mark to market basis, so that the change in value is brought into account.

S88A does not apply to normal commercial bonds, which may also reset, for example, interest rates in line with LIBOR. The difference is that, for normal commercial bonds,

• the changes are known from the outset
• the changes do not cause a significant change in the bond's value.

Nor does S88A apply to intra-group loans where interest is newly charged or not charged on an informal basis, unless it is done to secure a tax advantage.

Inspectors should refer any case that may be affected by S88A to Financial and Insurance Team (CT&VAT) in case of doubt or difficulty.

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