Finance Act 2011

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Interest on loans to defray money applied for certain purposes.

36.— (1) The Principal Act is amended by inserting the following section after section 840:

“840A.— (1) In this section—

‘asset’ means any asset other than—

(a) an asset that is treated by the provisions of section 291A(2) as machinery or plant for the purposes of Chapters 2 and 4 of Part 9, or

(b) an asset acquired as trading stock;

‘trading stock’ has the same meaning as in section 89.

(2) Subject to subsections (3), (6), (7) and (8), in computing the amount of the profits or gains to be charged to corporation tax under Schedule D, no sum shall be deducted in respect of any interest payable on a loan to a company (in this section referred to as the ‘investing company’) used in acquiring assets from a company which, at the time of the acquiring of the assets, was connected with the investing company if the loan is made to the investing company by a person who is connected with the investing company.

(3) Where, in an accounting period, interest is payable by an investing company on a loan to defray money applied in acquiring a trade (in this section referred to as an ‘acquired trade’) which immediately before its acquisition by the investing company was carried on by a company which was not within the charge to corporation tax, then subsection (2) shall not apply to so much of that interest as does not exceed the amount of the profits or gains of the acquired trade for that accounting period which are chargeable to tax under Case I of Schedule D.

(4) This section shall apply where a company acquires part of a trade as if that part were a separate trade.

(5) Where the investing company begins to carry on the activities of an acquired trade as part of its trade, then that part of its trade shall for the purposes of subsection (3) be treated as a separate trade and any necessary apportionment shall be made so that profits or gains shall be attributed to the separate trade on a just and reasonable basis and the amount of those profits or gains shall not exceed the amount which would be attributed to a distinct and separate company, engaged in those activities, if it were independent of, and dealing at arm’s length with, the investing company.

(6) (a) Where, in an accounting period, interest is payable by an investing company on a loan to defray money applied in acquiring an asset (in this subsection referred to as an ‘acquired asset’) which is leased by the company for that accounting period in the course of a trade (in this paragraph referred to as the ‘first-mentioned trade’) then, if immediately before that asset was acquired by the investing company it was not in use for the purposes of a trade carried on by a company which was within the charge to corporation tax, subsection (2) shall not apply to so much of that interest as does not exceed the amount of the profits or gains of the first-mentioned trade for that accounting period as is attributable to the acquired asset.

(b) For the purposes of paragraph (a), in arriving at the profits or gains of a trade attributable to an acquired asset, any necessary apportionment shall be made of the expenses and receipts of the trade.

(7) This section shall not apply to interest payable to a company (in this subsection referred to as the ‘first-mentioned company’) by an investing company where 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.

(8) This section shall not apply to any interest payable by a qualifying company (within the meaning of section 110).

(9) Where, as a part of, or in connection with, any scheme or arrangement for the making of a loan to the investing company by a person (in this subsection referred to as the ‘first-mentioned person’) who is not connected with the investing company, another person who is connected with the investing company directly or indirectly makes a loan to, a deposit with, or otherwise provides funds to the first-mentioned person or to a person who is connected with the first-mentioned person, then the loan made to the investing company shall be treated for the purposes of subsection (2) as being a loan made to the investing company by a person with whom it is connected.”.

(2) This section shall apply in respect of a loan made on or after 21 January 2011 other than any such loan made in accordance with a binding written agreement made before that date.