CFM92130 | Debt cap: intra-group short-term debt: examples of arrangements without a long-term funding purpose

This guidance applies to worldwide group periods of account ending before or straddling 1 April 2017.

Cases where it is likely to be possible to make an election under section 319

Example 1

A funding requirement should not be prevented from being short-term merely because it is likely that the same short-term requirement is likely to recur periodically.

For example, suppose a company has a seasonal trade and borrows to pay its wages bill. Most of its trade receipts arise in the second part of the year, during which it is able to repay the loan. It is likely that the same pattern will be followed each year. Each borrowing is a short-term loan relationship, provided that it satisfies one of the conditions in TIOPA10/S321.

This can be distinguished from example 2 at CFM92120 where a dividend is received but the funds will be used to pay a dividend, because in this case the company repays the debt from its trading receipts and the obligation to borrow in the following year arises out of the following year’s trading. It is not reasonable here to regard the trade receipts as being only temporarily available.

Example 2

A company wishes to pay a dividend but lacks cash necessary to do so. It anticipates that the cash will become available within 12 months and so takes on an intra group loan on 364-day repayment terms to fund the dividend. In fact, due to poorer than expected trading performance, it needs to take on another short-term loan to repay the first one when it becomes due, but the further loan is repaid within 6 months from funds generated from trading operations. In this case the fact that the funding requirement actually persisted for more than 12 months does not prevent this from being a short-term funding purpose, because of the reasonably held initial expectation that it would be repaid inside 12 months. Both the first and second loans may be regarded as short-term loan relationships.

Example 3

A company borrows to purchase a capital asset and its cashflow projections show that it is likely to be able to repay the debt within a year. So it borrows on a short-term basis. It repays the loan within the year, but borrows again on a short-term basis to fund a dividend, also based on cashflow forecasts that anticipate repayment within 12 months. These are two separate short-term funding requirements. If each loan meets one of the section 321 conditions, neither is debarred from being a short-term loan relationship by regulation 3 of SI2009/3313.