OT22007 - Interest and Financing

OTO Commentary. Section 494(2)(a) Money Borrowed

It is considered that debts can exist without there being money borrowed and, as S494 only allows interest deductions in respect of money borrowed, no deduction is allowed if the interest is paid otherwise than in respect of money borrowed.

This is relevant where interest is charged on unpaid interest. For a company involved, for example, in one development but with little or no production there may be a large negative cash flow. This will probably mean that the company will not have cash available to pay interest. If interest is merely charged to the account so that the account balance increases as a result of the interest then it is considered that the increase in the debt arising from the charging of unpaid interest is not money borrowed. As this is not money borrowed then compound interest charged on that part of the balance will not be within s494.

If the interest is paid as a result of a further borrowing of money being used to pay the interest we would argue that the money borrowed was not "used to meet expenditure incurred by the company in carrying on oil extraction activities ..." but that it was used to pay interest, which is not qualifying expenditure under s494.

For accounting periods ending on or after 1 April 1996, interest debits are allowable against ring fence profits where money has not been borrowed but a loan relationship is deemed to exist under FA96/s100 e.g. short interest such as trade interest or redetermination interest and interest on the late payment of royalties to the Department of Trade and Industry. ICTA88/s494(2)(c) allows such debits only if the underlying cause of the interest satisfies ICTA88/s494(2)(a)(i) i.e. a ring fence purpose.