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Where a company accounts for a loan relationship on an amortised cost basis, no deduction is permitted for a loss on a loan relationship that is referable to a time when the loan relationship was not subject to UK tax. This will be the case where a company resident abroad becomes resident in the UK or where a foreign company trading in the UK through a permanent establishment has a loan relationship which was not held for the purposes of that permanent establishment. The legislation restricting relief does not apply where accounts are drawn up on a fair value basis.

Relief for such an imported loss cannot be allowed to the extent that it creates a net loss in respect of that relationship. The restriction is made by requiring a credit to be made equal to any part of a loss referable to a time when the loan relationship was not subject to UK tax¹.

The operation of the restriction was considered by the FTT in UK Care No. 1 Ltd², where the tribunal