Chapter CFM97515
| Published date | 16 April 2016 |
| Record Number | CFM97515 |
| Court | HM Revenue & Customs |
| Issuer | HM Revenue & Customs |
The core business of a bank is to make loans funded by deposits and shortterm borrowing. This business model can be expected to give rise to net interest income for UK banking groups.
However, there may be little commercial difference to a bank between interest income and other fees charged in connection with the making of loans. For example, a bank may offer a product for a higher rate of interest, or for a oneoff arrangement fee and a lower rate of interest. In the context of banking, there is an argument that this sort of fee is equivalent to interest income given that it is a direct return on the lending.
Banks do not only deal in debt but also deal in the full range of financial instruments and do not see a particular distinction between lending of money and dealing in other types of financial instrument. In each case they will often look to minimise market risks in the products leaving a return. This is especially true for investment banking where interest is only one component of overall profit.
Nonetheless, this dealing in a wide range of financial instruments may still be supported by significant borrowing. In the light of this there is a risk that the main definition of tax-interest would introduce distortions into the UK banking market as it would provide a tax advantage for holding certain types of financial instrument over others and creates an uneven playing field between banks with a significant UK retail and lending operation and those without. Therefore, for a banking company there is a wider definition of tax-interest and group-interest for the fixed ratio method and group ratio method. This reflects the broader range of financial instruments in which they deal as part of their trading activity.
Modification of tax-interestUnder s450, tax-interest for a banking company will not be restricted to amounts brought into account in respect of loan relationships and some derivative contracts but is a more inclusive concept which will include all amounts brought into account from its dealing in financial instruments.
For this treatment to apply the dealing in financial instruments (which should be understood to include the origination and holding of financial instruments) must be part of the trade of the banking company and the amounts brought into account must be directly linked to that dealing. This treatment will apply to all...
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