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HMRC internal manual

Business Income Manual

Receipts: unclaimed balances: trade debts written back to profit and loss account

S97 Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005), S94 Corporation Tax Act 2009 (CTA 2009)

To produce a true and fair view, modern accountancy practice requires that the write-back of trade debt must always be credited to the profit and loss account. Our view is that the trading profits chargeable to tax should include the credit to the profit and loss account of a trade debt write back.

You should not make a computational adjustment to the accounts of a trade, profession or vocation which show a credit to the profit and loss account for trade debt written-back unless the debt is released as part of a voluntary arrangement (see BIM42701).

A trade debt is a debt that has been allowed as a deduction for tax purposes. The trader (including those carrying on professions or vocations) has received goods or services and has a legal debt to pay for them. It does not include debts incurred for capital or non-allowable expenditure. Accountants may refer to trade liabilities or trade creditors and to the crediting of the profit and loss account rather than trade debt write-back.

For the avoidance of doubt, a trade debt does not become a loan just because it has been outstanding for a long time and so it is outside the loan relationships rules (which apply to companies). See CFM31040.

Tax treatment when debt formally released

S97 ITTOIA 2005 for unincorporated businesses and S94 CTA 2009 for companies deal with the special situation where a debt is formally released. There are a number of specific conditions which must be met for the legislation to apply. For example, the provisions do not apply:

  • if there is no release, for example because the creditor merely writes off the debt, fails to invoice or demand payment, or fails to present a cheque for payment, or
  • if the release is part of a relevant arrangement or compromise (see BIM42740).

S97 ITTOIA 2005 and S94 CTA 2009 provide that where a deduction has been allowed for a debt that is later released, the amount released is treated as a receipt of the trade, arising in the period in which the release is effected.

The ‘release’ of a debt must involve a contractual agreement. A debt is not deemed to be released because the debtor is bankrupt or in liquidation. Where the release is under seal no consideration is necessary. All other releases must involve the debtor giving consideration for the release. The consideration may be in non-monetary form, for example shares. A formal waiver of remuneration is also a release of a debt.

Intra-group debt may be released as part of a sale agreement involving a change of control of a company. These transactions usually have to be examined in detail to ascertain what amounts are trade debt and whether there has been a release.

Intra-group debt may also be released as part of a ‘hive-across’ within a group, where all the assets and liabilities of a company are transferred to another company within the same group of companies, and as a result:

  • the transferee assumes the obligation to repay the creditor, and
  • the creditor consents to release the transferor from its obligations in return for the transferee accepting them

In this situation, there is a release of a debt so S97 ITTOIA 2005 or S94 CTA 2009 would apply as appropriate, but general principles also require the consideration given by the transferor to the transferee for accepting the liabilities to be deducted in computing profits which include any receipt under these provisions. The net result is that, if full consideration is given (by transfer of assets), the S97 ITTOIA 2005 or S94 CTA 2009 receipt is matched in full by the related deduction.

Particular circumstances of a release

Where the release occurs after the business has been discontinued (or treated for tax purposes as discontinued), the amount released is to be treated as a post-cessation receipt (see BIM90000 onwards).

A charge to tax should not be imposed when a debt is formally released if:

  • a charge has already been made because the debtor’s accounts showed a write-back in the profit and loss account for the debt, and
  • there have not been any intervening accounting entries reinstating the debt in the debtor’s accounts

Health warning

This page is part of the section of the Business Income Manual on unclaimed balances. You should read the whole section to understand this topic. See the contents page at BIM40200.