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HM Revenue and Customs Brief 33/08


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Issued 28 July 2008

Corporation tax: late payments of interest between connected companies

This Revenue & Customs Brief explains our approach to the application of paragraph 2 of Schedule 9 Finance Act (FA) 1996 in cases involving late-paid interest between connected companies.

Paragraph 2 Schedule 9 FA 1996

For corporation tax purposes, the taxation of profits and losses on loan relationships is governed by the rules in Chapter 2 Part 4 FA 1996. Credits and debits under loan relationships are normally taxed or relieved in accordance with amounts arising in accounts. However, the normal rules are modified in the case of loan relationships between connected parties. One such connected party rule is in paragraph 2 Schedule 9 FA 1996, which allows a debtor company a loan relationship debit on a paid basis rather than in accordance with its accounts, where interest payable to a connected party accrues but is not paid within 12 months following the end of the accounting period, and corresponding credits are not brought in under the loan relationships rules.

Paragraph 2 (sometimes referred to as the 'interest long stop' or the 'late interest rules') applies in a number of situations. One of these is where interest is paid by a company to a connected company that is not resident in the UK (paragraph 2(1A)).

Our interpretation of the rule has been challenged in a number of such cases on the basis that recent decisions of the European Court of Justice (ECJ) suggest that the rule contravenes one or more EC Treaty freedoms. While the correct legal position is not entirely clear, we have decided to put the point beyond doubt by amending the law and have issued a consultation document on options for changing the rule.

Consultation document

This consultation document can be found at, 'changes to corporation tax rules on late payments of interest between connected companies'

Proposals for amending the rule will take account of responses to the consultation.

Corporation tax returns in which the application of paragraph 2(1A) is in question

We will not seek to apply paragraph 2(1A) Schedule 9 FA 1996 as it currently stands to computations forming part of corporation tax returns submitted on or after the date of this Revenue & Customs Brief, or to any other accounting periods ending before the law is amended, in cases where the creditor company is not resident in the UK. Nor will we pursue the application of paragraph 2(1A) as it currently stands in such cases where enquiries into returns are currently open on this point.

The application of paragraph 2 in cases that do not involve late-paid interest between connected companies, that is, cases within paragraph 2(1B) to (1D), is not in question. Our interpretation of the law remains that set out in our Corporate Finance Manual at CFM5600.

Who to contact

Queries on this Revenue & Customs Brief should be addressed to:

Tony Sadler
HM Revenue & Customs
CT&VAT Products and Processes
Room 3c03
100 Parliament Street

email: Tony Sadler


Geoff Heaton
HM Revenue & Customs
CT&VAT Products and Processes
Room 3c03
100 Parliament Street

email: Geoff Heaton

About the Author

Crown Copyright 2008.

A licence is need to reproduce this article and has been republished for educational / informational purposes only. Article reproduced by permission of HM Revenue & Customs under the terms of a Click-Use Licence. Tax briefs are updated regularly and may be out of date at time of reading.

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Article Published/Sorted/Amended on Scopulus 2008-08-06 22:20:47 in Tax Articles

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