Before the loan relationships legislation was introduced by
Finance Act 1996 interest income was taxed when it arose.
ICTA88/S770, as extended by ICTA88/S773(4), had the effect of
imputing interest on a cross-border loan to the extent that such
interest would have arisen at arm’s length – see
INTM501040.
FA93 introduced a provision where, in specific circumstances,
interest income could be taxed on an accruals basis.
FA93/S61 - S66 applied
from 1st April 1993 until it was superseded by the
corporate debt legislation on
1st April 1996.
It applied to certain situations where the loan was
ostensibly on arm's length terms, with an arm's length rate of
return provided for, but where payment was deferred for an
unacceptably long period, such that the lender was denied an
interest return proportionate to the capital invested. If the
outstanding interest was added to the principal of the advance, the
lender might ultimately receive the expected return, giving an
economic arm’s length position in the long run, but not one
which would actually exist between parties at arm’s length to
each other and not one which resulted in a tax charge.
Many of the UK's trading partners both taxed and relieved
interest as it accrued. UK companies sought to exploit this
asymmetry by lending to non-resident associates on deferred
interest payment terms (whether formally agreed or de facto),
securing an immediate deduction on the accruals basis in the
overseas jurisdiction but with no matching taxable receipt in the
UK until possibly years later, if at all.
The legislation at FA93/S61 - 66 imposed a charge under Case
III Schedule D, as the interest accrued rather than as it arose. It
also covered deep discounts and deep gains, and other financial
instruments where the return could be artificially delayed.
It is unlikely that this legislation will come up in practice
any longer, but there is more extensive guidance at
INTM509110.
