CFM6405 - Taxing loan relationships: money debts: discounts
When does the rule on discounts apply?
A money debt that satisfies the conditions in FA96/S100 (1A) is brought within S100. The conditions are:
- the company is a creditor (and so the money debt is an asset)
- the money debt is one from which a discount arises.
Transitional rules exclude from the provision any discount on a
money debt which accrued before 16 March 2005.
FA96/S100 (1) (c) (iv) does not treat the debtor as party to
a loan relationship. So there will normally be no loan relationship
debit corresponding to the creditor’s credit.
S100 (3A) provides that a particular instance of where a
discount arises is where
- a company disposes of property for a deferred consideration,
- that deferred consideration is greater than the amount that would have been paid for the property if the price had been paid at the time of disposal and
- the difference, the excess, represents a return on an investment of money at interest
This rule ensures that where compensation is paid to the vendor
for being out of their money in the form of an increased amount of
sale price this increase is treated as a discount for the purposes
of S100.
Apart from this specific case, “discount” takes
its normal meaning. If, for instance, a bill of exchange were
acquired by a company at less than face value then any subsequent
profit could be taxed under S100.
S100 will not apply where profits are brought into account as
income under some other provision. So S100 is disapplied in
relation to any discount where
- the company brings the discount into account by virtue of FA05/S47 and FA05/S50 (alternative finance return), see CFM6050,
- the money debt is brought into account as a trading receipt, or
- the money debt arises from the disposal of property which is a loan relationship or a derivative contract. This condition is further qualified for disposals made on or after 22 March 2006 which have to be “relevant disposals”. This term is defined in S100 (1B). Relevant disposals are those where paragraph 12 Schedule 9 FA 1996 ( CFM5800) and paragraph 28 Schedule 26 FA 2002 apply (CFM13635), or would apply but for the operation of sub-paragraphs (2A) and (30) respectively of those Schedules or, alternatively, where the whole of the consideration is brought into account for the purposes of the loan relationships regime or the derivative contracts rules.
