Income and Corporation Taxes Act 1988

338 Allowance of charges on income and capital

(1) Subject to sections 339, 494 and 787, in computing the corporation tax chargeable for any accounting period of a company any charges on income paid by the company in the accounting period, so far as paid out of the company’s profits brought into charge to corporation tax, shall be allowed as deductions against the total profits for the period as reduced by any other relief from tax, other than group relief.

(2) Subject to the following subsections, to section 339 and to any other express exceptions, “charges on income” means for the purposes of corporation tax—

(a) payments of any description mentioned in subsection (3) below, not being dividends or other distributions of the company; and

(b) payments which are qualifying donations (within the meaning of section 339);

but no payment which is deductible in computing profits or any description of profits for purposes of corporation tax shall be treated as a charge on income.

(3) Subject to subsections (4) to (6) below, the payments referred to in subsection (2)(a) above are—

(a) any yearly interest (whether charged to revenue or capital), annuity or other annual payment and any such other payments as are mentioned in section 348(2) but not including sums which are or, but for any exemption would be, chargeable under Schedule A; and

(b) any other interest (whether charged to revenue or capital) payable in the United Kingdom on an advance from a bank carrying on a bona fide banking business in the United Kingdom, or from a person who in the opinion of the Board is bona fide carrying on business as a member of the Stock Exchange or bona fide carrying on the business of a discount house in the United Kingdom;

and for the purposes of this section any interest payable by a company as mentioned in paragraph (b) above shall be treated as paid on its being debited to the company’s account in the books of the person to whom it is payable.

(4) No such payment as is mentioned in subsection (3)(a) above made by a company to a person not resident in the United Kingdom shall be treated as a charge on income unless the company is so resident and either—

(a) the company deducts income tax from the payment in accordance with section 349, and accounts under Schedule 16 for the tax so deducted, or

(b) it is a payment of interest on a quoted Eurobond falling within section 124; or

(c) the payment is a payment of interest falling within section 340; or

(d) the payment is one payable out of income brought into charge to tax under Case IV or V of Schedule D.

(5) No such payment made by a company as is mentioned in subsection (3) above shall be treated as a charge on income if—

(a) the payment, not being interest, is charged to capital or the payment is not ultimately borne by the company; or

(b) the payment is not made under a liability incurred for a valuable and sufficient consideration (and, in the case of a company not resident in the United Kingdom, incurred wholly and exclusively for the purposes of a trade carried on by it in the United Kingdom through a branch or agency), and is not a covenanted donation to charity (within the meaning of section 339).

(6) No such payment of interest as is mentioned in subsection (3) above made by a company shall be treated as a charge on income unless—

(a) the company exists wholly or mainly for the purpose of carrying on a trade; or

(b) the payment of interest is wholly and exclusively laid out or expended for the purposes of a trade carried on by the company; or

(c) the company is an investment company, within the meaning of section 130 and including an authorised unit trust; or

(d) the payment of interest would, on the assumptions made below, be eligible for relief under section 353 by virtue of section 354 if it were made by an individual.

For the purposes of paragraph (d) above, it shall be assumed that if the land concerned is occupied by the company the conditions of section 355(1) are satisfied if the land either—

(i) is not used as a residence; or

(ii) is used as an individual’s main or only residence;

but the limit imposed by section 357 shall apply only in a case falling within paragraph (ii) above and shall then apply without regard to any loan made in connection with any other land.

(7) Any payment to which section 125(1) applies shall not be a charge on income for the purposes of corporation tax.