Beta This part of GOV.UK is being rebuilt – find out what this means

HMRC internal manual

Company Taxation Manual

From
HM Revenue & Customs
Updated
, see all updates

Close companies: loans to participators and arrangements conferring benefit on participators: Repayment of- assignment/novation

Assignment or novation of debt

It may be claimed that a loan has been repaid through either assignment or novation of the debt. It is important to establish the full facts surrounding the various arrangements and the book-keeping steps before deciding whether the arrangements amount to an assignment, a novation or something else and what the consequences will be in terms of repayment of the loans or charges on the participator under ITTOIA05/S415.

As a general rule in contract law, liabilities cannot be assigned because a person is entitled to know to whom he is to look for the satisfaction of his rights under a contract.

Novation

A liability may be transferred with the consent of all the parties involved but this is in effect the rescission of one contract and the substitution of a new one in which the same acts are to be performed by different parties. This is called a novation and it can only take place by agreement between all the parties. There must be consideration, which will usually take the form of the discharge of the old contract.

For a novation to be effective all parties must consent to it and there must be an intention to novate. This is the essential difference between a novation and an assignment.

A common form of novation occurs where A is indebted to B and C is indebted to A, and all three parties mutually agree that C shall become B’s debtor in place of A. Certain conditions, however, must be fulfilled, in order for the novation to be effective. These conditions are:

  • that the intermediate debt of A to B should be extinguished
  • that the same or a larger amount should be due from C to A, than A to B and
  • that a defined and ascertained liability should be transferred

If the debt is novated it has been released and not repaid. Section 458 relief would be due on the original debt, and ITTOIA05/S415 may apply. Depending on the facts, the new loan may also be subject to a new charge under Section 455.

As Millett J explained in Collins v Addies (65TC at page 201F):

as a matter of law it is not possible for a debtor to assign a legal liability … the transaction has to take the form of a novation … that undoubtedly constitutes a release of the old debt and its replacement by an entirely new debt.

Assignment

An assignment is the transfer of the benefit of a contract to a third party. As a result of which the assignee becomes entitled to sue the debtor under the contract. The debtor under the contract is not a party to the assignment and his consent is not necessary for its validity.

No particular form of words is necessary and consideration is not required to support the assignment provided the assignor has done everything required to be done by him to make the assignment complete. There must be some act by the assignor showing that he is passing the chose in action to the assignee. Further, the assignee must give notice to the debtor in order to make their title effective against the debtor. No such notice is necessary as between the assignor and the assignee.

Relief under S458 may or may not be due in the case of an assignment; this will depend on the facts. Has the loan from the close company actually been repaid or is it still outstanding, albeit from a different debtor? How exactly is it that the original debtor no longer owes the money?

Neither assignment nor novation

If the arrangements do not meet either the requirements for a novation or an assignment, then consider who now owes what to whom and how. In this type of case, consider the overall positions of:

  • who received what from each of the companies involved
  • who repaid each of the various debts and
  • when was each of the debts repaid

in order to decide whether there has been a repayment, a release or a write off and therefore the CTA10/S455 and ITTOIA05/S415 consequences.