GIM5090 - Taxation of the investment return: corporate and government debt: accounting periods ending after 31 March 1996: introduction

Legislation on corporate and government debt was introduced in the 1996 Finance Act, making far-reaching changes to the tax treatment of all debt, and transactions in debt. It abolished any capital/revenue distinction and generally requires accounts figures to be followed where an authorised accounting basis is used, sweeping away a mass of complex statute law.

The main guidance on the subject is in the CT Manual at CTM50060 onwards (periods beginning before 1 October 2002) and the Corporate Finance Manual at CFM5000 onwards (periods beginning on or after 1 October 2002).

A loan relationship is the basic building block of the new rules – see CTM50060 onwards and CFM5050 onwards.

A company which is a party to a loan relationship in the course of activities forming an integral part of its trade, will treat the credits and debits brought into account for tax purposes as receipts or expenses of the trade.

The words “an integral part of its trade” are derived from Nuclear Electric (68TC670) (see GIM5020) and are now enshrined in statute (FA96/S103 (2)). In relation to assets that would before FA 1996 have been treated as realisation basis assets therefore, all interest, discount and increases in value or profits on sale will be trading receipts, while decreases in value (including provisions for bad debts etc.) and losses on sale will be trading expenses.

Where liabilities are concerned the test is whether they are held for the “purposes of the trade”. This is a somewhat wider test than the “integral part” test for assets - see CTM50200 and CFM5301 for guidance.

Any assets or liabilities not falling within the “integral part” or “purposes of the trade” tests will be treated as non-trading items- this would cover, for example, loans made to structural subsidiaries. And see GIM9000+ for general insurance companies carrying on business on a mutual basis.