OT22011 - Interest and Financing

OTO Commentary. Section 494(2)(d) interest paid to associate at non- commercial rate.

Interest paid to an associated company does not qualify for a ring fence deduction to the extent it exceeds a commercial rate. For the purposes of s494(2)(d) account can be taken of the terms of the borrowing and the standing of the borrower but not of the amount of the debt itself (but see comments on thin capitalisation below). ICTA88/s770 has a similar effect to s494(2)(d), but the latter applies generally and does not require a Board’s direction.

For CTSA periods, S770 is replaced by ICTA88/Sch28AA, which is more widely drawn than S770 so that if any aspect of the loan (including the amount) differs from arm's length terms the allowable interest may be restricted accordingly.