How does the loan relationship rules work for companies?

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# How the Loan Relationship Rules Work for Companies

## What the Law Says

### Definition of a Loan Relationship
A company has a loan relationship where:
- it stands in the position of a **creditor or debtor** as respects any money debt (whether by reference to a security or otherwise), **and**
- the debt arises from a **transaction for the lending of money**

Where a company is a creditor, it has a **creditor relationship**; where it is a debtor, it has a **debtor relationship**.

The rules are found in **Part 5 of CTA 2009**, with Part 6 covering "relationships treated as loan relationships" — financial arrangements to which the loan relationship rules apply but which do not legally arise from the lending of money.

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### How Profits and Deficits Are Taxed: Trading vs Non-Trading

**Trading loan relationships (CTA 2009 s.297):**
Where a company is a party to a loan relationship *for the purposes of a trade it carries on*:
- Credits are treated as **receipts of the trade**, brought into account in calculating trading profits
- Debits are treated as **expenses of the trade**, deductible in calculating those profits

**Non-trading loan relationships (CTA 2009 s.301):**
Credits and debits not brought into account under s.297 are **non-trading credits and debits**. If non-trading credits exceed non-trading debits, the company has **non-trading profits** chargeable to corporation tax. If non-trading debits exceed non-trading credits, the company has a **non-trading deficit**.

**Non-trading deficits** are subject to specific relief rules:
- The basic rule is that the deficit must be **carried forward** and set off against non-trading profits of later accounting periods
- A company may alternatively make a **claim** to set off the deficit against profits of the deficit period or earlier periods, or surrender it as **group relief**
- A company may also claim to **carry forward** a specified amount past the first later period

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### Special Rules

**Connected companies:** Special rules apply where a loan relationship exists between connected companies, including restrictions on profits/losses and rules on late interest.

**Intra-group transfers (CTA 2009 Part 5, Chapter 4):** Where a loan relationship is transferred between companies in the same group, **continuity of treatment** applies — the transferee takes over the loan relationship at the "notional carrying value" (essentially book value, subject to tax adjustments), so no gain or loss is crystallised on transfer.

**Connected party debt and fair value accounting:** Where a loan relationship is with a connected party, CTA 2009 s.349(2) requires the use of an **amortised cost basis** of accounting for tax purposes, overriding the actual accounting treatment.

**Anti-avoidance (CTA 2009 s.418):** Where a connected debtor and creditor are party to a loan relationship and debits exceed credits, specific anti-avoidance provisions apply. References to a company being a party include a company that **indirectly** stands in the position of debtor or creditor through a series of loan relationships or relevant money debts.

**Change of company ownership:** Where there is a change in ownership, restrictions apply on the carry-forward of pre-acquisition non-trading deficits from loan relationships to accounting periods after the change.

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## HMRC Guidance / Practice

### History and Policy Rationale
Prior to Finance Act 1996, companies were taxed on interest mostly on a **paid basis** under general tax rules. FA 1996 introduced a self-contained regime following **accountancy practice** and moving away from the revenue/capital divide. The legislation was subsequently rewritten into **CTA 2009 Parts 5 and 6** as part of the Tax Law Rewrite project.

### Core Principle
HMRC summarises the regime as follows: *"all profits and gains arising to a company from its loan relationships are chargeable as income."* In simple terms, a company has a loan relationship when it is a creditor or debtor for money — the term is intended to be **wide**, embracing most debts that are legally money debts.

### Accounting Basis
The treatment of interest **follows accountancy methods**, permitting two authorised treatments:
1. **Accruals basis** — brings in interest on an accruals basis
2. **Mark-to-market basis** — brings in interest on a due and payable basis

Neither method uses a simple paid/received basis. The legislation applies to **all interest paid by or to companies**, including, for example, interest on trade debts.

### Areas Where Specific Tax Rules Override Accounting
Although the regime broadly follows accounting, HMRC identifies specific areas where the exact acceptable treatment for tax is prescribed, including:
- Bad debts
- Connected persons
- Capitalised interest
- Late payment of interest
- Transactions not at arm's length

### Structure of HMRC's Full Guidance (CFM Manual)
HMRC's Corporate Finance Manual (CFM) covers the rules as follows:
- **CFM31000** — what loan relationships are
- **CFM32000** — how they are taxed
- **CFM33000** — computation of taxable amounts
- **CFM34000** — intra-group transfers
- **CFM35000** — connected companies
- **CFM36000** — partnerships
- **CFM37000** — special cases (e.g. collective investment schemes, deeply discounted securities)
- **CFM38000** — anti-avoidance
- **CFM40000+** — "deemed loan relationships" (money debts not arising from lending of money)

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