CFM73250 | Other tax rules on corporate finance: structured finance: exceptions

Section 765 exceptions

Section 770 CFM73100, provides that the charging provision and the relieving provisions are subject to the exceptions in section 771 (see below and CFM73250.

The first in section 771 (1) disapplies the relevant effect and deductibility rules in 759 or 765 if the whole of the advance is

• charged to tax as an amount of income or

• brought into account in computing income.

CFM73100 explains the distinction between the two.

The effect of this rule is that where the whole of the advance is taxed as income in the case of a relevant person it is not necessary to consider the relevant effect rules in section 759 and 765. In the unlikely case that the advance is only partly brought into account as income then there will be a relevant effect only in relation to the amount of income that will now escape tax.

Example

A sells to B an income producing asset for 100. The asset will produce 105 of income over the next 12 months after which it will be transferred back to A. A records a financial liability of 100 in respect of the advance and will also record a finance charge of 5 reflecting the implicit interest. All of the conditions in section 758 are satisfied.

If all 100 of the advance were charged to tax as income then section 771 (1) would prevent section 759 from applying.

If 60 of the advance were charged as income then there would be a relevant effect only in relation to the 45 that would not now be charged as income. Accordingly A would be charged to tax on the 45 under section 759 but would be allowed relief for the finance charge of 5 recorded in the accounts.

In practice, if part only of the advance is charged as income, HMRC staff should be willing to accept such computations as produce a just and reasonable result.