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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Loan relationships: computational rules: credits and debits not brought into account: releases of debt: insolvency

Releases of debt: insolvency

When a debt is released, that is, the creditor has waived the debtor’s obligation to repay, amounts credited in the debtor’s accounts in respect of the release will normally be taxable as loan relationship credits.

Legal waivers of debts are rare. You are more likely to come across situations where the debt has been written off as no recovery is expected, but the debtor has not been legally released from its obligation to pay.

CTA09/S322

The requirement for the debtor to credit the amount released does not applywhere the debtor company uses the amortised cost basis and

  • the release is part of a statutory insolvency arrangement (see below), or
  • the release is in consideration of ordinary shares issued by the debtor (that is, a debt-equity swap - see CFM33200), or
  • the debtor meets ‘insolvency conditions’ (see below), and the debtor is not connected to the creditor.

Insolvency terms

Insolvency covers a wider range of terms.

A statutory insolvency arrangement is defined (see CTA2010/SCH1/S701(3)). It is, in broad terms, a formal arrangement where the debtor company is released from all or part of its liabilities under an agreement with its creditors that allows the debtor company to continue trading and avoid liquidation. The accounts will show the credit, but this is excluded for tax purposes.

The arrangement may be

  • a voluntary arrangement under the Insolvency Act 1986, Schedule 4 or 5 to the Bankruptcy (Scotland) Act 1985 or the Insolvency (Northern Ireland) Order 1989,
  • a compromise or arrangement under Part 26 of the Companies Act 2006 or the Northern Ireland equivalent (substituted with effect from 6 April 2008),
  • any similar arrangement under the law of a non UK country.

In the version of the legislation applying for earlier periods, the release had to be part of a relevant arrangement or compromise. This was a more restricted definition.

CTA09/S323 explains the meaning of the ‘insolvency conditions’, which refer to insolvent liquidation, insolvent administration, insolvent receivership, provisional liquidation (including Northern Ireland Insolvency Orders), and equivalent rules outside the UK.