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 that 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) 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) the sole business of the first-mentioned company is the on-lending to the investing company of moneys which the first-mentioned company has borrowed from persons who are not connected with either or both the first-mentioned company and the investing company.
• (7)(b) the first mentioned company is a “qualifying financing company” within the meaning of the section 76E.

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 2024