Section 381A | Charge to tax on disguised interest

(1)This Chapter applies where a person is party to an arrangement which produces for the person a return in relation to any amount which is economically equivalent to interest.

(2)Income tax is charged on the return if the return is not charged to income tax under or as a result of any other provision of this Act or any other Act.

(3)Subsection (2) does not apply to a return that would be charged to income tax under or as a result of another provision but for an exemption.

(4)For the purposes of this Chapter a return produced for a person by an arrangement in relation to any amount is “economically equivalent to interest” if (and only if)—

(a)it is reasonable to assume that it is a return by reference to the time value of that amount of money,

(b)it is at a rate reasonably comparable to what is (in all the circumstances) a commercial rate of interest, and

(c)at the relevant time there is no practical likelihood that it will cease to be produced in accordance with the arrangement unless the person by whom it falls to be produced is prevented (by reason of insolvency or otherwise) from producing it.

(5)In subsection (4)(c) “the relevant time” means the time when the person becomes party to the arrangement or, if later, when the arrangement begins to produce a return for the person.

(6)In this Chapter “arrangement” includes any agreement, understanding, scheme, transaction or series of transactions (whether or not legally enforceable).