Ch.8 - Raising finance

Question 1

What are loan relationship rules?

Answer 1

TRADING:

• interest on late paying debtors
• overdraft interest
• interest re funding of daily operations or P&M

NTLR:

• bank interest, debenture interest
• interest on overpaid/overdue tax
• interest re purchase of shares, rental property
• capital profits/losses on NTLR items
• impairment or waiver of a loan
• incidental costs

Question 2

What is the tax treatment of loan write-offs?

Answer 2

UNCONNECTED COMPANY:
- allowable income/expense

CONNECTED COMPANY:

• no taxable income/expense
• when company purchases debt from 3rd party, but debt is owed to connected company, debtor company is taxed on deemed release of the debt (as original lender has allowable deduction for loss on disposal of debt)

Question 3

What is the tax treatment of foreign exchange items?

Answer 3

TRADING TRANSACTIONS:

• using FX at time of transaction
• FX P/L on settlement taxed as trading income

MONETARY ITEMS (loans, bank, receivables, payables)

• retlanslated at YE
• FX P/L taken to allowable trading/non-trading loan relationship income or expenses

NON-MONETARY ITEMS (investments, capital assets)

• translated when purchased, no further retranslation
• on sale converted to FX at that date - part of capital P/L

OVERSEAS PEs:

• accounts are retranslated at YE using closing rate
• restatements of opening net assets at closing rate
• P/L taken to reserves, NOT P/L - no tax impact

Question 4

What is tax treatment of finance leases?

Answer 4

Lessor:

• taxed on rental income
• capital allowances available

Lessee:
- finance cost (interest element) and depreciation allowable as economically equivalent to rent

Question 5

What is tax treatment of operating leases?

Answer 5

Lessor:

• taxed on rental income
• capital allowances available

Lessee:
- rental charges allowed against trading income (accruals basis)

Question 6

What is tax treatment of hire purchase agreements?

Answer 6

Purchasor:

• capital allowances on cash value
• allowable deduction for interest charge

Question 7

What are qualifying corporate bonds (QCBs)?

Answer 7

• non-convertible
• normal commercial terms
• denominated in sterling