Webinar takeaways – Loan relationships

Loan relationships are on first glance a straightforward concept. In general, a loan relationship arises where there is interest due to or payable by companies on a non-trade money debt (s302 CTA 2009). A non-trade money debt is, at its simplest, a loan from a bank.

The loan relationship rules permit losses incurred on such a debt to be utilised in a very flexible manner:

• they can be offset against any profits (except when carried back);
• carried back 12 months (against non-trade profits), used in the current accounting period or carried forward to use against future profits (in each case, any profits);
• unlike other allowances, the amount to be utilised can defined by the company, without reference to other allowances and without an ‘all or nothing’ stipulation.

In short, loan relationship losses are ‘valuable’.

It stands to reason therefore that HMRC will fight against the use of significant losses incurred in this way, an example being Shinelock Ltd, recently heard in the FTT. The company was represented by our speaker, Patrick Boch of Old Square Tax Chambers. .

Shinelock Ltd

Mr A, director and shareholder of S Ltd, provided collateral and funding to help S Ltd purchase a commercial property. In exchange, it was understood that when the property was sold, S Ltd would pay Mr A the capital gain on the increase in value. During the course of HMRC’s enquiry, the taxpayer had argued that he was the beneficial owner of the property and therefore S Ltd was not subject to any gain. (At the time, Mr S was not UK resident and would not have had to pay any CGT on the gain in value).

At Tribunal, the argument considered was that the amount equal to the gain was an expense incurred by S Ltd in relation to the loan relationship. As such, it was a deductible cost. During the case, the importance of the existence of a contract was highlighted – was there anything to demonstrate that S Ltd would pay Mr A an amount equal to the increase in property value? Was there a written contract? This demonstrates the importance of private law in relation to loan relationships, particularly between connected parties.

Patrick confirmed in the Q&A that there aren’t any conditions around commerciality (for example) in respect of loan relationships between connected parties. This may be because if any tax advantage arose, it would likely be dealt with by s441 CTA 2009, or other legislation (e.g. the distribution rules).

Key points

A few takeaways from the talk are:

• loan relationships can be a lot more complex than at first glance, so make sure you understand the detail of the transactions;
• when advising clients, bear in mind the importance of Private Law. Where possible, ensure that the terms of any agreement are set out in writing so there is no ambiguity about whether a loan relationship exists, or whether any expenses paid relate to the relationship;
• if HMRC decide to challenge the client’s arrangements they will be very keen to protect their position;
• if going to tribunal, you may need expert evidence on GAAP from a chartered accountant, who can advise when and how the loan relationship debits would be recognised in the accounts; and
• if there is any ambiguity on the nature or use of losses, it is worth obtaining an external opinion sooner rather than later.

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