OT22030 - Interest and Financing

Section 770 ICTA 1988 Interest at non-commercial rate

ICTA88/s770 applies to transactions with connected persons not just overseas but also, in the case of a ring fence company, in the UK - by virtue of s771(3). Thus interest or other financial charges paid at more than a commercial rate to such a lender may be disallowable.

ICTA88/s770 also applies to interest free or low interest loans made by a company so as to impute interest to that company, by virtue of ICTA88/s773(4).

For CTSA accounting periods, S770 is replaced by ICTA88/Sch28AA. although it is more widely drawn in terms of the aspects of the transaction that need to be considered. More detailed information on Schedule 28AA follows later.

Unless the company has a financial trade, which will only very rarely be true of companies dealt with in OTO, the interest deemed to arise will be charged under Case III of Schedule D. ICTA88/s492(1) in setting up the ring fence for CT refers to the carrying on of specified activities as part of a trade being taxed as if they were a separate trade. OTO accepts therefore that S492 only applies to income charged under Case I of Schedule D and not to interest charged under Case III or income deemed to arise under S770/or Schedule 28AA that is charged under Case III.