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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Loan relationships: connected companies and impairment: debtors

Normal rules: debtor does not bring in credits for releases

The normal rule in CTA09/S358 is that a debtor does not bring in credits in respect of amounts released by the connected creditor, where the debtor uses the amortised cost basis (as it will under CTA09/S349). This applies even where the creditor becomes insolvent and is no longer denied deductions for such releases by reason of CTA09/S357. For an explanation of what is meant by insolvent see CFM33190

Creditor becomes insolvent

CTA09/S359 continues this exclusion of credits where a debtor is released from a liability when the creditor is insolvent. The conditions are that

  • the liability is released during a period in which an amortised cost basis is used,
  • the creditor is insolvent within the meaning of CTA09/S357 (CFM35410)

and the debtor was connected within CTA09/S348 before the creditor entered insolvency proceedings, and immediately after it was not.

Debtor becomes insolvent

Whether or not insolvency breaks a connection is a question of fact. If the connection between the debtor company and creditor company is not broken by the debtor company’s insolvency then the normal rule in CTA09/S358 will continue to apply and releases will not be taxed. However if the insolvency breaks the connection then CTA09/S322 ensures that a release by the creditor company is not taxable on the debtor company.

Debtor in liquidation: example

MN Ltd lends £30,000 on 1 August 2008 to another group company, GH Ltd, at annual interest of 10%. The whole group is in some financial difficulty and GH Ltd doesn’t pay any interest. GH Ltd makes up its accounts to 31 July each year and on 31 July 2009, MN Ltd releases it from interest owed of £3,000. On 31 January 2010, GH Ltd goes into insolvent liquidation and MN Ltd releases the outstanding debt.

Where MN Ltd and GH Ltd continue to be connected after the insolvency proceedings start, GH Ltd is not required to bring in a credit for the amounts released (CTA09/S358), and the same result is achieved by CTA09/S322 where MN Ltd and GH Ltd are no longer connected as a result of the insolvency proceedings.

There is also no tax charge for amounts released before the date of liquidation.