Corporation Tax Act 2009 section 418

Loan relationships involving connected debtor and creditor where debits exceed credits

Section 418 deals with situations where connected companies are debtor and creditor under the same loan relationship, and the debtor treats the loan as bifurcated (that is, split into a loan element and a derivative element) while the creditor does not, resulting in the debtor's deductions exceeding the creditor's taxable income from the arrangement.

• This section applies where connected companies are on opposite sides of a loan relationship and the debtor company bifurcates the loan (splitting it into a host loan and a derivative component) while the creditor does not.
• When the debtor's total tax deductions (debits) from the loan relationship exceed the creditor's total taxable income (credits), an imbalance arises that must be corrected.
• The creditor company is required to bring additional credits into account to eliminate the mismatch, ensuring the group does not obtain a net tax advantage from the inconsistent accounting treatment.
• The additional credits brought in by the creditor equal the difference between the debtor's debits and the creditor's credits, so that total debits and credits are aligned across the connected parties.