What does section 1006 of the Corporation Tax Act 2010 do?

Section 1006 caps the principal secured by a security at the amount of new consideration actually received by the company on issue. This prevents companies from inflating the notional principal to make excessive interest or other returns appear commercially reasonable, thereby avoiding distribution treatment under paragraph E of section 1000(1).

How is the principal secured by a security determined under section 1006?

The principal secured cannot exceed the new consideration the company actually received when it issued the security. Any stated principal in excess of that consideration is disregarded when assessing whether returns on the security are reasonable for the purposes of determining whether a distribution has arisen under paragraph E of section 1000(1).

What happens if a company issues a security with a face value exceeding the consideration received?

The return on the security is tested for reasonableness against the lower consideration received, not the higher face value. For example, if a security has a face value of £1,000,000 but only £700,000 was received, any interest is assessed against £700,000. Excess returns above a reasonable commercial rate may be treated as distributions.

Does section 1117(6) impose any further restriction on the principal secured?

Yes. Section 1117(6) imposes a further restriction where securities are issued at a discount to their redemption value and are not listed on a recognised stock exchange. In those specific circumstances, the amount treated as principal secured may be reduced further beyond the cap imposed by section 1006.

Corporation Tax Act 2010 section 1006

Distributions exceeding consideration received for issue of security

Section 1006 limits the amount that can be treated as "principal secured" by a security for the purposes of determining whether a distribution has arisen under paragraph E of section 1000(1).

The "principal secured" by a security cannot exceed the new consideration actually received by the company when it issued that security.
Any amount of principal stated in excess of the consideration received is disregarded when assessing whether returns on the security are reasonable.
This prevents companies from inflating the notional principal to make excessive interest or other returns appear commercially reasonable and thereby avoid distribution treatment.
A further restriction applies under section 1117(6) where securities are issued at a discount to their redemption value and are not listed on a recognised stock exchange.

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