Draft Guidance on Funding Bond legislation – Finance Bill 2008

This guidance will be incorporated within the funding bond chapter of the Corporate Finance Manual. Any comments on this draft guidance should be made to Lesley Hamilton

Funding Bond Repayments
CFM17042 Background

It is possible that the creditor who accepts the funding bond as a payment of interest is a non taxpayer, for example the creditor may be non-resident and able to make a double taxation treaty claim or the creditor, if an individual, may have insufficient income to pay tax.

In these circumstances the creditor can make a repayment claim for the tax deducted and paid over to HM Revenue & Customs (HMRC). If a non-resident then the claim will be made to CAR: Residency. Our policy has been that where a repayment claim involves tax deducted and paid to HMRC by funding bond then the creditor is asked if they would be willing to accept satisfaction of the repayment claim by all or part of the funding bond held by HMRC. This is not always possible, for example the creditor may not be willing to accept the funding bond as satisfaction of the repayment claim in which case HMRC would have to make a monetary repayment.

Legislation was introduced in FA2008 to enable HMRC to satisfy such repayment claims using funding bonds where the funding bond was issued on or after the 12 March 2008. This legislation formalises the policy and provides that HMRC can request that the issuer divides the funding bonds held by HMRC so that the repayment claim can be satisfied. FA2008 amended S939 ITA07 and inserted a new section – S940A ITA07.

CFM17044 when will HMRC satisfy a repayment claim using money?

If the funding bond was issued before the 12 March 2008 then the creditor can decide whether or not to accept the funding bond used to pay the tax deducted in satisfaction of their repayment claim. If the creditor decides not to accept the funding bond in satisfaction then the repayment claim will be satisfied using money.

There will also be rare circumstances where funding bonds are issued on or after the 12 March 2008 where a money payment will be made rather than satisfying the repayment claim using the funding bond. This is where it would be impracticable for the bond issuer to divide the funding bond so that HMRC can make the repayment. The meaning of impracticable is discussed at CFM17052.

Section 582 ICTA88 that requires the issue of a funding bond is treated for all the purpose of the corporation tax acts as if it were the payment of an amount of interest equal to the value of the bonds at the time of their issue.
For an example of the importance of establishing the value of the funding bond at issue see the example below.

Example

Debtor Company issued funding bonds in December 2007 to pay yearly interest due on 31 December 2007 of £1million. The face value of the funding bonds issued was similarly £1million. The majority of the creditors were exempt from tax deduction and so Debtor Company only had to deduct tax from £150,000 of the interest paid. To meet this requirement Debtor Company retained funding bonds with a face value of £30,000 (20 per cent of £150,000) and tendered them to HMRC as payment of the tax deducted with their quarterly return on form CT61.

The office dealing with the Debtor Company’s corporation tax arranged for the funding bond issue to be valued by Shares and Valuation, who advised that the value of the funding bonds at the time of issue was not the face value of £1million but was in fact £800,000. It is this value that is used for the purposes of corporation tax and any repayment claims. Because the valuation differs from the face value of the funding bonds the value of the funding bonds paid over to HMRC is similarly adjusted for tax purposes to £24,000 [(£800,000/£1million) x £30,000]. The value of £24,000 is the amount that should be included by the Debtor Company in a revised CT61 for the quarter to 31 December 2007.

Creditor Company S.A. is one of the recipients of funding bonds from which tax was deducted and is entitled to reclaim the tax deducted. Creditor Company S.A. was entitled to receive funding bonds with a gross face value of £100,000, from which funding bonds with a face value of £20,000 were retained by the Debtor Company for the tax deducted and paid over to HMRC. The value of the £20,000 funding bonds at the time of issue is £16,000 [£800,000/£1million) x £20,000]. Creditor Company S.A. is not willing to accept the funding bonds retained in satisfaction of its repayment claim and requests a money payment. HMRC repays in money to Creditor Company £16,000 – the value of the funding bonds at the time of issue and not the face value of the funding bonds. HMRC continues to hold the funding bonds with a face value of £20,000 until redemption when payment is requested from the Debtor Company.

CFM17046 when will HMRC make repayments using funding bonds?

There are certain conditions to be met before HMRC can satisfy a repayment claim using funding bonds. These are discussed below.

  • Where the funding bond was issued before the 12 March 2008 and the claimant has agreed to accept the funding bond in satisfaction of the repayment claim.

Otherwise for funding bonds issued on or after the 12 March 2008:

  • the funding bonds used to satisfy the repayment must have been tendered to HMRC in respect of tax deducted from interest paid by funding bond
  • the relevant creditor making the repayment claim is the creditor within S939 ITA07 from whose interest the issuing company was required to deduct tax

This ensures that the funding bond used to pay the tax deducted is connected with the repayment claim.

The value of the funding bond for tax purposes is the same value that it had as at the time of issue and it is this value that is relevant for the repayment claim. In practice this will not make a difference to the proportion of funding bonds used to satisfy the repayment claim but it will be relevant if the repayment claim cannot be satisfied by funding bonds (see CFM17044) and for accurate completion of the Debtor Company’s CT61.

In order to satisfy the repayment claim any restrictions on the tender or transfer of the funding bonds are ignored to enable HMRC to tender the funding bonds in satisfaction of the repayment claim and transfer the funding bonds to the claimant as necessary (section 939 (4C) ITA07).

CFM17048 processing a repayment claim that is to be satisfied by funding bonds

All funding bonds paid over to HMRC are held centrally by the Funding Bond Section. Once you are aware that the repayment claim involves funding bonds then you should contact the Funding Bond Section (via Sarah Taylor of DMB Process and Strategy) to ensure that the funding bonds held by HMRC are suitable to satisfy the repayment claim, for example that the denomination of the funding bond is appropriate. If the funding bond is not suitable then the Funding Bond Section of will contact the issuing company to request that the funding bond held by HMRC is altered to enable HMRC to satisfy the repayment claim – see CFM17050.

If the funding bond is suitable to satisfy the repayment claim then the appropriate part of the funding bond will be returned to the creditor making the repayment claim. The office handling the funding bond repayment claim will authorise the Funding Bond Section to return the appropriate part of the funding bond to the claimant. The Funding Bond Section will then send the appropriate part of the funding bond direct to the claimant or the claimant’s authorised representative.

CFM17050 what if there is no appropriate combination of funding bonds to satisfy the repayment claim?

If the funding bond is issued on or after 12 March 2008 then new S940A ITA07 will apply to that funding bond. This section applies if the funding bond used to pay the tax deducted and held by HMRC is not suitable for satisfying the repayment claim. For example the funding bond may be a single bond with a face value of £50,000 whereas the repayment claim is for funding bonds with a face value of £10,000.

S940A enables the Commissioners of HMRC to request that the bond issuer secures that the Commissioners hold the combination of bonds to enable the Commissioners to satisfy the repayment claim. In the example used above the issuing company would be asked to divide the funding bond into two, one part to be kept by HMRC (£40,000) and the other part (£10,000) used by HMRC to satisfy the repayment claim. The bond issuer itself may request the assistance of another person or persons to comply with the Commissioners’ request. The bond issuer or other person from whom assistance is requested does not have to comply with the request from the Commissioners if it would be impracticable to do so. The meaning of impracticable is discussed at CFM17052.

Requests under S940A ITA07 are made by the Funding Bond Section (acting on behalf of the Commissioners of HMRC) and if you become aware that such a request is necessary please contact the Funding Bond Section as advised in CFM17048 above.

When considering whether or not to request the assistance of the issuing company the Commissioners may take into account:

  • the value of the funding bond at its time of issue
  • the interest that the relevant creditor, or any other person has in the funding bond
  • the terms on which the funding bond is issued

CFM17052 Meaning of impracticable

The word impracticable is used in both S582 (2) ICTA88 and S939 (4C) ITA07. In S582 the bond issuer does not have to retain the proportion of the funding bonds to satisfy the requirement to deduct tax if it is impracticable to do so. In S939 the bond issuer or any other person so required does not have to ensure that the Commissioners have the correct combination of funding bonds to satisfy a repayment claim if it impracticable to do so.

Impracticable is not defined in either section and so takes its ordinary meaning. It means ‘impossible in practice’ and so it will only be very rare occasions where it is impracticable for the bond issuer to comply with these obligations.

For example if only one funding bond is issued by the Debtor Company for the gross amount of the interest we would not accept that it was impossible in practice for the Debtor Company to issue two funding bonds for the net interest and the tax deducted. If the interest had been paid in money and the Debtor Company would have deducted tax it is not impracticable for the Debtor Company to similarly deduct tax by retaining part of the funding bond issue. The fact that the Debtor Company unilaterally decides or in conjunction with its creditors agrees to issue only one bond does not mean it is impracticable to issue two or more.