Prior to 1996, interest (or any equivalent return such as the
yield on deep discount and deep gain securities) was generally
chargeable to tax in the UK when it arose rather than as it
accrued, unless the income was chargeable to tax as a receipt of a
trade.
But most of the UK's major trading partners tax all interest
as it accrues to the lender. These countries also tend to give tax
relief to a borrower as interest accrues and multinational groups
sought to take advantage of this difference in tax treatment.
Loans were deliberately structured so that tax relief could
be obtained overseas on the interest accruing but not paid while
liability to tax in the UK was deferred, often for many years.
Since the terms of these loans were otherwise completely
commercial, we were unable to apply the transfer-pricing
legislation. In 1993 therefore, we enacted specific legislation -
FA93/S61-66 - to counter such schemes.
FA93/S61 to FA93/S66 were introduced to prevent exploitation
of this type of mismatch by providing that interest payable to UK
companies by overseas associated companies was charged to tax as it
accrued, subject to a number of exceptions.
The legislation covered deep discounts and deep gains as well
as deferred interest loans and applied only to connected companies.
The broad effect of the legislation was to bring forward the date
of taxation of deferred interest or discounts on loans to overseas
associated companies. Its application in practice has been
generally straightforward. Complexity arises mainly out of the need
to distinguish commercial loans (which are exempt) in such a way
that the legislation cannot be circumvented by the opportunities
which related parties have to enter into non-standard loan
arrangements. Further guidance on these Sections can be found in
the August 1994 Tax Bulletin (TB12I). CT & VAT, International
CT will provide advice and guidance if difficulties arise.
The legislation applies up to 1996 when it was superseded
by the introduction of a general accruals regime by Finance Act
1996.
