Where, in an accounting period, a company's loan relationship has an unallowable purpose, the debits attributable to the unallowable purpose and any credits relating to exchange gains must be excluded from the loan relationship computation. Where the debits relate to more than one purpose, a just and reasonable apportionment is to be made1.
What is an unallowable purpose?
A loan relationship has an unallowable purpose in an accounting period if, at times during that period, the company is a party to it or has entered into a related transaction (see 'Related transactions' at D1.703) for an unallowable purpose2. The debits which might be affected are interest paid or accrued due, discounts, a decrease in the value under a fair value (previously, mark to market) basis of accounting, a bad debt provision, the release of a debt and a loss on disposal or surrender of a debt.
An unallowable purpose is one which is not among the business or other commercial purposes of the company. This is specifically made to include3:
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