Annex 1: Minor Changes in the Law Change 62: Relationships treated as loan relationships etc: Industrial and provident society payments treated as interest under loan relationship: section 499 Agricultural co-operative societies
All natural interest paid by an agricultural co-operative society is chargeable under Chapter 2 of Part 4 of FA 1996 as a payment under a loan relationship. The interest is chargeable under Schedule D Case III by virtue of section 80(3) of FA 1996 unless the underlying loan relationship is held for the purposes of a trade, in which case the income is chargeable under Case I of that Schedule by virtue of sections 80(2) and 82(2) of FA 1996. The interest does not fall within section 486(4) so there is no obligatory Case III charge under that section.
All dividends paid by an agricultural co-operative society are chargeable under Chapter 2 of Part 4 of FA 1996 as payments under a loan relationship. The dividends do not fall within section 486(4) of ICTA so there is no obligatory Case III charge under that section. But, since there is no underlying loan relationship to fall within section 80(2) of FA 1996, the income is chargeable under Case III by virtue of section 80(3) FA 1996.
The effect of section 499 is that the Schedule D Case III charge in section 486(4) of ICTA is ignored and the existence of an underlying loan relationship that may be held for the purposes of a trade is assumed.
Whether a company pays more or less tax as a result of this change will depend on a number of factors, for example whether it has trading losses brought forward to reduce what will, as a result of this change, be a trading credit. In most cases the change is not expected to result in any tax difference.
This change is in principle adverse to some taxpayers and favourable to others but is expected to be favourable in most cases.