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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Loan relationships: computational rules: credits and debits not brought into account: revaluation

Restrictions on writing down debt {#IDADPCWF}.

CTA09/S324 provides that a company that accounts for a creditor loan relationship on an amortised cost basis can only claim a debit from a write-down of a debt where this arises from

  • an impairment loss (CFM33220), or
  • a release by the company of all or part of the debt.

This means that companies cannot get relief for a general bad debt provision, or for writing down a debt to the lower of cost or market value, even if such a debit features in the company’s accounts. This applies both to loan relationships and to money debts treated as loan relationships by CTA09/PT6.

The provision at CTA09/S324 does not apply where fair value accounting is used. ‘Fair value accounting’ includes not only the use of mark to market accounting under UK GAAP before FRS26 could apply or has been applied, but the situation where the loan relationship is the hedged item in a fair value hedge. See the example below. Neither does it affect exchange gains or losses.

If an amount is disallowed for tax purposes, because it is

  • a revaluation of a debt that is not an impairment loss, or
  • a general bad debt provision that was, in a period of account beginning before 1 January 2005, not permitted under ICTA88/S74 (1)(j), or
  • a revaluation of a debt that was, in a period of account beginning before 1 January 2005, disallowed by the rule in FA96/S85(2)(c) denying debits where an accruals basis allowed for revaluation (other than for exchange gains and losses or authorised bad debt arrangements)

a credit arising from reversal of the amount will not be taxable - CTA09/S325.

Fair value hedge example

A company holds bonds that pays interest at a fixed rate. In order to hedge the risk arising from fluctuations in interest rates, it enters into an interest rate swap, effectively converting the interest from a fixed to floating rate. It designates a fair value hedge of interest rate risk, with the bonds as the hedged item and the swap as the hedging instrument.

The effect of using hedge accounting is that changes in the fair value of the bonds, in so far as they relate to interest rate changes, are taken to profit and loss account. But no adjustment is made to the fair value of the bonds for any other reason, for example if the credit status of the issuer changes.

Arguably, the carrying value of the bonds in the company’s balance sheet is not ‘fair value’ as defined in CTA09/S313. HMRC take the view, however, that a company is using fair value accounting for the bonds. If interest rates rise and amounts are debited to profit and loss as the fair value of the bonds decreases, CTA09/S324 does not preclude the company from obtaining relief.