A company normally deducts interest as it accrues in its accounts, whether or not it has been paid. Under section 373 of the Corporation Tax Act 2009, that changes where the lender is a participator in a close company (or connected with one) or an occupational pension scheme: if the interest is not paid within 12 months of the end of the accounting period in which it accrues, and the lender is not taxed on it under the loan relationships rules, the company only gets relief when it pays.

Why does the late interest rule exist?

Under the loan relationships rules a company’s interest deduction follows its accounts (see loan relationships). HMRC explains at CFM35810 that this creates a mismatch where the lender is outside those rules: the borrower gets relief as interest accrues, while a lender such as an individual is taxed only when the interest is received, or the lender may be outside the UK tax net altogether. Connected parties could arrange their affairs to exploit the gap, so Chapter 8 of Part 5 of the Corporation Tax Act 2009 (CTA 2009) postpones the borrower’s relief in defined cases.

This page looks at the rule as a whole, across all the lenders it reaches. For the most common case, a director shareholder lending to their own company, see charging interest on a loan to your company.

When does the rule apply?

Section 373(1) applies where two conditions are met and the case falls within section 375 or section 378:

  • Condition A: the interest is not paid within 12 months following the end of the accounting period in which it would otherwise accrue.
  • Condition B: credits representing the full amount of the interest are not brought into account under the loan relationships rules for the corresponding creditor relationship in any accounting period.

Where both apply, the debit is brought into account on the assumption that the interest does not accrue until it is paid. Relief is deferred, not denied.

Condition B is about whether the lender is within the loan relationships rules, not whether it actually pays tax. HMRC says at CFM35840 that if the interest is chargeable in principle for the lender, it does not matter that losses or group relief mean no tax is payable.

Which lenders are caught today?

Section 372(3) now lists only two kinds of connection. The other two, connection through control (former section 374) and through a major interest (former section 377), were removed by section 25 of Finance Act 2015. HMRC explains at CFM35985 that the changes apply to loans entered into on or after 3 December 2014, and to earlier loans for interest accruing from 1 January 2016, unless a loan was materially changed in between, for example by a substantial increase in the amount lent, a substantial extension of the term or a transfer of the receivable to a tax haven.

Loans to close companies (section 375)

The rule applies where the borrower is a close company and the lender is any of the following:

  • a participator in the borrower, or an associate of a participator;
  • a company controlled by a participator, or in which a participator has a major interest;
  • a person who controls a company that is a participator, an associate of that person, or a company that person controls.

Section 376(3) excludes a person who is a participator only because they are a loan creditor, and section 376(2) treats a participator in a parent company as a participator in its subsidiaries. HMRC’s examples at CFM35870 show how little it takes: a lender who owns one ordinary share out of 3,000 is a participator and so is caught, as is a lender with one share in the parent of the borrowing company. For what makes a company close, see close company rules.

The company lender exception

Where the lender is a company, section 375(4A) adds a further condition: the lender must be resident for tax purposes in a non qualifying territory, or effectively managed in a non taxing non qualifying territory, at some time in the accrual period. HMRC explains at CFM35960 that this condition dates from Finance Act 2009 for accounting periods beginning on or after 1 April 2009, and that a non qualifying territory is broadly one without a UK double tax treaty containing a non discrimination article. In practice a UK or treaty country company lender is outside the rule, and the debtor deducts interest as it accrues. The rule has no such limit where the lender is an individual or a pension scheme.

There are also exemptions for close companies that are only close because of collective investment scheme limited partnership investors, where the borrower is a small or medium sized enterprise and no relevant person is resident in a non qualifying territory (section 375(3) and (4)).

Loans from pension schemes (section 378)

The rule also applies to loans made by trustees of an occupational pension scheme where, at some time in the accrual period, the borrower employs employees to whom the scheme relates, is connected under section 466 with such an employer, or has a major interest in (or is subject to a major interest held by) such an employer. CFM35950 gives the example of a parent company borrowing from its subsidiary’s pension scheme: the connection with the employer subsidiary is enough.

When is interest treated as paid?

This is often where disputes start. HMRC’s view at CFM35830, drawing on Minsham Properties v Price, is that a book entry counts as payment only if the paying company has enough funds available and the lender is free to draw on them unconditionally. Simply crediting interest to a loan account the company could not actually pay out is not payment. Where the lender advances a separate loan so that the borrower can pay the interest, CFM35830 refers to Macniven v Westmoreland Investments Ltd on whether that counts as payment.

Section 379 widens the rule to lenders who stand indirectly in the creditor position through a series of loans, so routing the loan through an unconnected intermediary does not escape it.

How does the timing work in an example?

HMRC’s own example at CFM35820 shows the effect. TF Ltd, a close company, borrows from its director and majority shareholder. Interest of £2,000 accrues in the year to 31 March 2019 but is not paid until 5 November 2020.

Step Result
Accounting period in which interest accrues Year to 31 March 2019
12 month payment window ends 31 March 2020
Paid within the window? No, paid 5 November 2020
Lender within loan relationships rules? No, an individual taxed on receipt in 2020 to 2021
Period in which TF Ltd gets relief Year to 31 March 2021, when paid

Without the rule, TF Ltd would have had relief nearly two years before the director was taxed on the same interest.

Illustration only. If interest is rolled up and paid at the end of a five year loan from a caught lender, interest for each year that is still unpaid 12 months after that year end is deferred. In the final years, the deduction in the year of payment includes the deferred interest from earlier years as well as that year’s accrual.

What if deferred interest is never paid?

CFM35810 explains that section 373 assumes the interest does not accrue until it is paid. So if interest that has been deferred is later written off, for example in a debt for equity swap, there are no debits relating to it to reverse and no loan relationship credit arises. The company never gets relief for it, and nothing is taxed on the release.

What are the common mistakes?

  • Applying the old control test to group loans. A UK parent lending to its UK subsidiary is no longer within the rule for interest accruing on current loans, though transfer pricing and other rules may still apply; see intercompany loans.
  • Missing small shareholdings. A lender with any share or voting right in a close company, or in its parent, is a participator.
  • Assuming a loan account credit is payment. Without available funds that the lender can draw unconditionally, it is not.
  • Overlooking the similar discount rule. CFM35030 notes that discount on deeply discounted securities payable to a connected creditor may also be allowed only on redemption.
  • Forgetting the lender’s side. An individual lender is taxed when interest is received, and the company may need to deduct Income Tax when it pays; see directors’ loan accounts for the wider picture.

Who counts as connected differs between tax rules; for the general definition, see connected persons.

If HMRC opens a check into your return, tax investigation insurance pays your accountant’s fees. Solar Protect cover pays up to £100,000 with no excess; it never pays tax, interest or penalties. Read how our cover works or get a quote.

Related Accountapedia entries

Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.