Income Tax (Trading and Other Income) Act 2005 section 381A

Charge to tax on disguised interest

Section 381A establishes a charge to income tax on returns from arrangements that are economically equivalent to interest, ensuring such returns cannot escape taxation simply because they are structured to avoid being classified as interest.

• Where a person is party to an arrangement producing a return economically equivalent to interest, that return is charged to income tax under this chapter unless it is already taxed (or exempt) under another provision
• A return is economically equivalent to interest only if it reflects the time value of money, is at a rate reasonably comparable to a commercial interest rate, and there is no practical likelihood of it ceasing to be produced (other than through the payer's insolvency)
• The definition of "arrangement" is deliberately broad, covering any agreement, understanding, scheme, transaction, or series of transactions, whether or not legally enforceable
• The charge applies to returns produced by the arrangement in any way, including gains arising on disposal of an instrument before maturity or on a person otherwise ceasing to be party to the arrangement