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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Loan relationships: connected companies and impairment: debtors: deemed releases of impaired debt: where holders of impaired debt become connected

CTA09/S362: creditor and debtor become connected

A deemed release will also occur when a previously unconnected creditor company (‘C’) that holds impaired debt becomes connected with the debtor company (‘D’).

This case operates where, if you imagine a period of account of the creditor company ending immediately before the connection starts, the carrying value of the debt would have been adjusted for impairment.

The amount of the deemed release, and hence the credit to be brought into account by the debtor company, is the amount of the impairment adjustment that would appear in such accounts.

If the creditor company has accounted for the loan relationship at fair value through profit and loss, no impairment loss would appear in accounts, and therefore CTA09/S362 does not apply. However, since the company must start to use an amortised cost method for tax purposes from the beginning of the accounting period in which the connection starts, it will need to make an adjustment under CTA09/S350. CFM35490 gives examples of the interaction between CTA09/S350 and CTA09/S362. There is a further example of CTA09/S362 at CFM35500,

CTA09/S362: creditor and debtor become connected on or after 1 April 2012

Finance Act 2012 changed the way the amount of a deemed release under CTA09/S362 was calculated. Where companies become connected on or after 1 April 2012, the amount of the deemed release taxable on the debtor company is the difference between the pre-connection carrying value (PCCV) in C and the PCCV in D.

The PCCV is defined differently in relation to C and D. For C the PCCV means the carrying value in the C’s accounts at the end of the period of account before the companies became connected, or, where C acquired the debt after that date, the consideration given for the acquisition. The PCCV thus starts with the position as adjusted under section 350 (if appropriate), and will reflect the amortised cost basis of accounting that the company is required to use from the beginning of the accounting period in which connection starts. No impairment, or reversal of impairment, between the beginning of the accounting period and the date of impairment will therefore be relievable or taxable.

For D the PCCV means the carrying value in D’s accounts if a period of account had ended immediately before the companies became connected. Profits and losses in the debtor’s accounts will, subject to specific rules, be taxable or relievable as loan relationships debits and credits in the normal way.

See the examples at CFM35505.

CTA09/S362: creditor and debtor become connected between 27 February 2012 and 1 April 2012

Where previously unconnected creditor and debtor companies become connected on or after 27 February 2012 but before 1 April 2012, the charge under CTA09/S362 is the higher of

  • the amount described above and
  • the difference between the pre-connection carrying value of the debt in D’s accounts and C’s accounts.

Cases where this applies should be referred to the Financial Products Team.