»Ê¹ÚÌåÓýapp

CTA09/S441-442

»Ê¹ÚÌåÓýapp ‘unallowable purpose ruleâ€� (at s441-442) is not limited to loan relationship debits that relate to interest, but also potentially applies to other loan relationship debits, including debits on exchange losses, to disallow them, and to exchange gains credits, to make them non-taxable. If there is an unallowable purpose, the extent of disallowance/ non-taxability will be determined by attribution on a just and reasonable apportionment (see CFM38150).

More detail is as follows.

Although much of this guidance, and in particular many of the examples, refer to debits that relate to interest for ease of drafting, the unallowable purpose rule can potentially apply to any loan relationship debits, for instance, representing:

• accrued discount

• a decrease in the value taken into account under fair value accounting

• an exchange loss

• the creation or increase in an impairment loss

• the release of a debt

• a loss on ceasing to be party to a debt, whether by disposal or otherwise

Given that the rule generally applies to counteract debits, the rule will normally be relevant to a debtor company. In some circumstances, however, a lending company is required by the accounting treatment to recognise accounting debits in respect of a loan relationship entered into by it, for instance in relation to impairment losses or exchange losses, in which case it may be necessary to consider the application of the rule. For instance, in Keighley & Anor v Commissioners for His Majesty's Revenue and Customs [2024] UKFTT 30 (TC) (Keighley v HMRC) a company, Primeur, decided to write off part of a secured loan that should have been repaid in full, to a second company: the second company repaid unsecured loans from shareholders/ directors, including repaying in full unsecured loans from the two majority shareholders in common. »Ê¹ÚÌåÓýapp FTT held that Primeur’s decision to write off part of the loan (a related transaction) was for a purpose not within the business or other commercial purposes of the company and that the related debits should be disallowed.

»Ê¹ÚÌåÓýapp unallowable purpose rule can also potentially apply to credits on exchange gains (to make them non- taxable).