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Changes to the late interest rule after 1 April 2009

Schedule 20 Finance Act 2009 amended the late interest rule for accounting periods beginning on or after 1 April 2009. It inserted new conditions at CTA09/S374(1A), CTA09/S375(4A), and CTA09/S377(2), applying respectively to cases where the creditor is a ‘connected company� (CFM35860), a close company participator (CFM35870) or a ‘major interest� company (CFM35920).

In each case the new condition is that the late interest rule will only apply where the creditor is a company that is ‘resident� in a ‘non-qualifying territory�.

‘Non-qualifying territoryâ€� takes its meaning from TIOPA2010/S173, and is explained at INTM412090. It means any territory that is not a ‘qualifying territoryâ€�, which in turns means a territory with which the UK has a double taxation treaty that contains a non-discrimination article. »Ê¹ÚÌåÓýapp list of such territories at INTM412090 includes all EU countries and the majority of other normal tax jurisdictions. It excludes tax havens and similar jurisdictions. If a territory is not on this list, HMRC’s view is that a creditor company is located in a ‘non-qualifyingâ€� territory for the purposes of the late interest rule.

Resident is defined as ‘liable to tax by reason of domicile, residence, or place of management, or effectively managed in a non-qualifying territory other than one in which companies are liable to tax by reason of domicile, residence or place of management�.

Some territories do not levy tax by reason of domicile, residence or place of management, and a company effectively managed in such a territory would not be ‘resident for tax purposesâ€� in such a territory. »Ê¹ÚÌåÓýapp words ‘effectively managedâ€� are broadly equivalent to the concept of ‘place of managementâ€� used in Double Taxation Treaties. A company will therefore be caught by the late interest rule even if its creditor is managed in a jurisdiction that does not levy an income tax or corporation tax on profits, or one that only taxes local-source income, and would not otherwise be ‘residentâ€� there for tax purposes.

»Ê¹ÚÌåÓýapp changes made by FA09 mean that in the majority of cases where the creditor is a company, unless that company is located in a tax haven, normal loan relationships principles will apply, and interest will be deductible as it accrues in the accounts, not when it is paid. »Ê¹ÚÌåÓýapp changes have no effect where the creditor is an individual or a pension scheme.

Equivalent changes were made to the similar rule that applies to deeply discounted securities (CFM37200).

»Ê¹ÚÌåÓýapp Budget 2009 announcement on the amendment to the rule stated that if the changes to these provisions were abused, anti-avoidance measures would be introduced in a future Finance Bill. HMRC staff should report examples of avoidance to CTIAA (Financial Products Team).