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HMRC internal manual

Corporate Finance Manual

Loan relationships: connected companies and impairment: debtors: deemed releases of impaired debt: tax treatment

Tax treatment of acquired impaired debt: transactions on or after 16 March 2005

CTA09/S361 deals with the acquisition of creditor rights by a connected company at undervalue, and CTA09/S362 deals with parties becoming connected where the creditor’s rights are subject to an impairment adjustment - that is, they deal with the acquisition of impaired debt, and with impaired debt between companies that become connected. The predecessor legislation to this rules was at FA96/SCH9/PARA4A and was introduced by FA 2005, but the original legislation was superseded by a revised version in FA (No2) 2005.

The rules are intended to facilitate the rescue of ailing companies by unconnected parties, and apply in two circumstances:

  • where a company acquires impaired debt and is already connected with the debtor company or becomes connected at the same time; this is subject to an exception
  • where a company already holds impaired debt and becomes connected with the debtor company.

CFM35450 covers the first circumstance, and CFM35460 the second.

Deemed release

In both cases, there is deemed to be a release of the ‘impaired’ portion of the debt. This gives rise to a taxable credit in the debtor company. The normal rule in CTA09/S358 that no credit is brought into account by the debtor when connected party debt is released is disapplied. This is referred to as a ‘deemed release’.

A money debt owed by a company may be treated as a loan relationship by CTA09/S479 (see CFM31040) and may therefore meet the initial test for the application of S362. From 22 April 2009, CTA09/S361 and CTA09/S362 may also apply to trade and similar debts as, with the insertion of CTA09/S479(2)(d), they are now one of the kinds of debt listed in CTA09/S479(2) (CFM41060).

‘Connection’ here has the same meaning that it has in CTA09/S466. If two companies are not regarded as connected because they both controlled by a governmental organisation (CFM35110), or because the creditor holds the debt in exempt circumstances (CFM35130), they are not connected for these purposes.

The rules will not apply if the creditor company buys the debt from another company, and the ‘old creditor’ and ‘new creditor’ are connected - either one controls the other, or they are under common control - so there will be no tax charge on the debtor company when a debt is transferred within a group.

When making the comparison between the carrying value in the debtor’s books and the amount paid by the creditor, accrued amounts and any amounts paid or received in advance are ignored.

Deemed releases on or after 14 October 2009

See CFM35510 where an exemption from a deemed release under CTA09/S361 arises in respect of impaired debt acquired on or after 14 October 2009.