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HMRC internal manual

Corporate Finance Manual

Loan relationships: connected companies and impairment: debtors: deemed releases of impaired debt: deemed releases on or after 14 October 2009: the corporate rescue exception

Debt buybacks on or after 14 October 2009: CTA09/S361A

No deemed release arises under CTA09/S358 on the acquisition of impaired debt by a connected creditor where the corporate rescue exception applies. But if the creditor subsequently releases the debtor from the debt, a tax charge arises on a ‘release of relevant rights’ (CFM35520).

The exception requires the following conditions to be met.

  • The connected creditor’s acquisition of the impaired debt must be an arm’s length transaction: this condition is the same as for the application of CTA09/S361 before 14 October 2009 (CFM35450).
  • There must have been a ‘change in ownership’ within the meaning of ICTA88/S769 (CTM06340) in the period beginning one year before the acquisition of the debt and ending 60 days after.
  • It must have been ‘reasonable to assume’ that but for the change in ownership, the company would have met one of the insolvency conditions within a period of 12 months from the date of ownership (CFM33190).
  • It is reasonable to assume that but for the change in ownership, the acquisition of the debt would not have been made.

‘Reasonable to assume that the insolvency conditions will be met’

HMRC will accept that it is reasonable to assume that the company would have been met the insolvency conditions where, for example:

  • the corporate rescue exemption will be met where insolvency is avoided not only by the change of ownership itself but also by steps taken following the change of ownership;
  • under guarantee arrangements that apply to the debtor company’s borrowing, enforcement action might actually be taken against another company in the group;
  • there is evidence that the insolvency conditions would be met but the company has not publicly acknowledged its potential insolvency because of the need to engage in sensitive discussions with lenders and auditors over banking covenants and its going-concern status.

Evidence to support such a ‘reasonable assumption’ might include management accounts showing an insolvent balance sheet, or evidence of a breach of a debt covenant breach.