Introduction Background Note
12.At Budget 2013, the government announced a review of the corporation tax rules governing corporate debt (or ‘loan relationships’) and derivative contracts. There was consultation on a wide-ranging package of measures to update and simplify these regimes and to reduce their susceptibility to tax avoidance. This section is being introduced in the context of these wider changes, which are expected to be included in a later Finance Bill.
13.The ‘late-paid interest’ rules were originally introduced as anti-avoidance provisions to prevent mismatches between the timing of relief for interest in debtor companies and its taxation in the creditor. Interest may be accrued in the accounts of the debtor, and relieved, even though it may not be actually paid and taxed on the creditor until much later, or at all. A similar effect could be achieved through mismatches in the timing of relief for, and taxation of, discounts on deeply discounted securities.
14.Rules in respect of late-paid interest on loans are in Chapter 8, Part 5 of CTA 2009, while Chapter 12 contains rules for deeply discounted securities. Under the late-paid interest rules, relief for interest unpaid 12 months after the period in which it accrued is deferred until it is actually paid. In the case of discounts on deeply discounted securities, no 12 month period is involved, but relief is not available until the security is redeemed.
15.The Chapter 8 rules apply in four cases: where the parties are connected; where the creditor is a participator in a close company; where one of the parties has a major interest in the other; and where the loan is made by trustees of an occupational pension scheme. The Chapter 12 rules for deeply discounted securities effectively mirror the first, second and third of these cases. This section is concerned with the rules in so far as they apply to connected parties and where one party has a major interest in the other.
16.In 2009 the scope of the rules was greatly restricted, so that, in the case of connected parties or where one party has a major interest in the other, they now only apply where the creditor is resident in a ‘non-qualifying’ territory (broadly, a ‘tax haven’). The anti-avoidance effect of the rules is therefore now very limited in those cases.
17.In addition, the rules have regularly been used by some groups to manage and manipulate the emergence of profits and losses. Loss relief rules permit excess amounts, including trading losses and non-trading loan relationship deficits to be set against a company’s other profits of the same period or surrendered to other group companies, again to be set against profits of the same period. Limited carry back of losses to earlier periods is also possible. All these rules provide immediate relief. However, if trading losses or non-trading loan relationship deficits are not used in any of these ways, they can only be carried forward until such time as the company in which they arose can set them against any future profits which may emerge from the same source. Carried forward amounts cannot be set against profits from other sources or surrendered as group relief.
18.For this reason, some groups use structures involving companies in non-qualifying territories and deliberately defer payment of interest so that losses can be timed to arise in accordance with the availability of profits elsewhere in the group which can absorb them. This effectively sidesteps the intention behind the group relief rules that relief should be available for in-year losses only. Nor does it accord with the anti-avoidance purpose of the late paid interest rules, described above.
19.The wider changes to the loan relationships rules will include introduction of a new regime-wide anti-avoidance rule, whose scope will include counteraction of timing mismatches of the kind originally targeted by the late paid interest rules.