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HMRC have published a consultation document entitled Changes to Corporation Tax Rules on Late Payments of Interest Between Connected Companies, and a brief explaining the department's approach on the subject.
The taxation of profits and losses on loan relationships is governed by the rules in FA 1996, Part 4 chapter 2.
Credits and debits under loan relationships are normally taxed or relieved in accordance with amounts arising in accounts, although the normal rules are modified in the case of loan relationships between connected parties.
One such connected party rule is in FA 1996, Sch 9 para 2, 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.
Para 2 - sometimes referred to as the 'interest long stop' or the 'late interest rules' - applies in various situations, including where interest is paid by a company to a connected company that is not resident in the UK (para 2(1A)).
HMRC's interpretation of the rule has been challenged on the basis that recent European Court of Justice decisions suggest that the rule contravenes one or more EC Treaty freedoms.
While the correct legal position is not entirely clear, HMRC wish to clarify the situation and have issued the above mentioned consultation document.
HMRC will not seek to apply para 2(1A) as it currently stands to computations forming part of corporation tax returns submitted on or after 28 July 2008 (i.e. the date of the Revenue & Customs Brief), or to any other accounting periods ending before the law is amended, in cases in which the creditor company is not resident in the UK.
Nor will HMRC pursue the application of para 2(1A) as it currently stands in such cases in which enquiries into returns are currently open on this point.
Comments should be sent by 24 October 2008 to Tony Sadler, HMRC, Room 3c03, 100 Parliament Street, London SW1A 2BQ, or email tony.sadler@hmrc.gsi.gov.uk.
