Revenue Note for Guidance

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Revenue Note for Guidance

840A Interest on loans to defray money applied for certain purposes

Summary

This section is an anti-avoidance provision that denies a trading deduction for interest payable on intra-group borrowings to purchase assets from a connected company.

Details

Definitions

(1)(a) & (b) The definition of “assets” does not include intellectual property which qualifies for capital allowances nor an asset acquired as trading stock. Trading stock has the same meaning as in section 89.

The definition of “loan” includes a promissory note and any other agreement or arrangement having a similar effect.

Interest on a loan from a connected company

(2)(a) & (b) Subject to certain exceptions, interest on a loan from a connected person to purchase an asset from a connected company is not deductible in computing the profits or gains chargeable to corporation tax under Schedule D. Interest on any form of refinancing such a loan is similarly not deductible.

Interest on a loan to acquire a trade

(3) Interest on a loan to an investing company to acquire a trade, which prior to its acquisition was carried on by a company that was not within the charge to corporation tax, may be deducted in computing an investing company’s profits up to the amount of the profits or gains from the acquired trade which are chargeable to tax under Case I of Schedule D.

(4) The acquisition of part of a trade by an investing company shall for the purposes of this section be treated as if that part of the trade were itself a separate trade.

(5) Where the investing company begins to carry on an acquired trade (or part thereof as the case may be) as a part of its own trade, the acquired trade (or part thereof) is treated as a separate trade for the purposes of determining the limit to which interest can be deducted. The profits/gains of that separate trade should be apportioned on a just and reasonable arm’s length basis in order to determine the profits or gains of the separate trade.

Interest on a loan to a leasing company – exclusion

(6)(a) Where a loan from a connected person to an investing company is used by the investing company to acquire an asset—

  • that is to be leased out by the investing company for an accounting period in the course of a trade of leasing, and
  • which prior to its acquisition was not in use for the purposes of a trade carried on by a company within the charge to corporation tax,

subsection (2) does not, of itself, restrict deductibility on the interest payable, in computing the leasing company’s profits, up to the amount of profits or gains of the leasing trade attributable to the acquired asset.

(6)(b) In order to determine the profits or gains of a trade attributable to the acquired asset, it will be necessary to apportion the expenses and receipts of that trade.

On-lending exclusions

(7) The provisions of section 840A do not apply to interest payable by an investing company to a company (referred to as “the first-mentioned company”) where:

  • (7)(a) other than the holding of shares in an investing company or investing companies, the sole business of the first-mentioned company is the on-lending to the investing company, or investing companies, of moneys which the first-mentioned company has borrowed from persons who are not connected with either or both the firstmentioned company and the investing company or investing companies.
  • (7) the first mentioned company is a “qualifying financing company” within the meaning of the section 76E.

Interest deduction allowed, in certain circumstances

(7A) Section 840A(7A) disapplies subsection (2) in certain circumstances. For the purposes of this subsection, a connected person which lends to an investing company is referred to as the ‘connected lender’, the loan is referred to as the ‘connected loan’ and a connected company from which the asset is acquired is referred to as the ‘connected seller’.

Subsection (2) is disapplied where:

  • (7A)(b)(i) the connected seller has borrowed to acquire the asset and, prior to the asset being acquired by the investing company, the connected seller obtained a deduction for the interest on those borrowing when computing its profits or gains charged to corporation tax under Schedule D.
  • the connected lender is:
    • (7A)(b)(ii)(I) subject to tax in the State on the interest income in relation to the connected loan, or
    • (7A)(b)(ii)(II) by virtue of the laws of a relevant territory, resident in relevant territory for the purposes of tax and is subject to tax on the interest income in relation to the connected loan under the laws of that relevant territory, and
  • (7A)(b)(iii) it is reasonable to consider that the connected loan is made for bona fide commercial purposes and does not form part of any arrangement or scheme of which the main purpose, or one of the main purposes is the avoidance of tax.

(7A)(a) For the purposes of section 840A(7A)(b)(ii)(II) “relevant territory” and “tax” have the same meaning, respectively, as in section 246.

Subsection (7A)(c) places a limit on the amount of interest to which paragraph (b) applies by placing a limit on the quantum of the principal of a connected loan.

(7A)(c)(i)(I) & (II) The principal on the connected loan shall not exceed

  • the principal outstanding on the borrowings of the connected seller in respect of the asset concerned at the time immediately prior to the acquisition of the asset by the investing company or,
  • where section 840A(7A)(c)(ii) applies, the ‘maximum principal amount’.

(7A)(c)(ii)(I) The circumstances outlined in subparagraph (c)(ii)(I) are where an investing company acquires an asset from a connected seller and subsection (2) was disapplied by paragraph (7A)(b) to an amount of interest on a connected loan made to a company (referred to as the ‘previous investing company’) that is connected to the investing company in respect of a previous acquisition of that asset from a company connected with the previous investing company (referred to as the ‘previous connected seller’).

(7A)(c)(ii)(II) Where subparagraph (c)(ii)(II) applies, the maximum principal amount shall be an amount equal to the principal outstanding on the borrowings of the previous connected seller at the time immediately prior to the acquisition of the asset concerned by the previous investing company and, where there has been more than one previous acquisition referred to in clause (I) in respect of the asset concerned, the maximum principal amount shall be an amount equal to the principal outstanding on the borrowings of the previous connected seller at the time immediately prior to the acquisition of the asset concerned by the previous investing company in the earliest such previous acquisition of the asset concerned to occur.

(7A)(c)(iii) Where only a portion of the borrowings of the connected seller, or previous connected seller, as the case may be, relate to the asset acquired by the investing company then apportionment of those borrowings, on a just and reasonable basis, is required to perform the calculations required under this paragraph.

Securitisation companies

(8) Deductibility of interest in the case of qualifying companies, within the meaning of section 110, is dealt with in section 110 and as such they are not within the scope of this section.

Schemes or arrangements for the making of loans

Loans made (as part of, or in connection with) schemes or arrangements whereby a connected person loans or provides funds to an unconnected person (whether directly or indirectly) and that unconnected person then makes a loan to the investing company, shall be treated as having been made by a connected person.

Relevant Date: Finance Act 2025