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HMRC internal manual

Corporate Finance Manual

Loan relationships: consortia companies and impairment: overview

Why are rules needed for consortia companies?

Group companies are connected under CTA09/S348, and the rules in CTA09/PT5/CH5 prevent them from bringing in debits for impairment on loans between group members because of this connection (CFM35300).

But often companies that are members of a consortium are not connected with the consortium company under S348, so the impairment rules in Chapter 6 do not apply. Consortium companies can then follow normal accounting practice in computing loan relationship debits for impairment and credits for recoveries.

Consortium members could then benefit from both impairment debits and group relief, and could effectively get double economic relief for the same loss.

For example, a consortium member that makes a loan to a consortium company by

  • bringing in debits for impairment in its accounts, and
  • claiming group relief from the consortium company.

This effect could be achieved by the consortium member’s group as a whole, for example

  • a consortium member claims group relief
  • a fellow group member brings in debits for impairment bad debts in respect of its loan to the consortium company.

There are, therefore, restrictions in CTA09/PT5/CH7 to prevent this. For periods of account beginning before 1 January 2005, the terminology of the predecessor legislation (FA96/SCH9/PARA5A) referred to bad debts, not impairment, but the rules worked in the same way.

CTA09/S364 prevents double relief by making four basic restrictions. It

  • reduces impairment debits of any period by any amount of group relief claimed in the same period (CTA09/S365);
  • makes a corresponding reduction in any subsequent impairment recoveries by the amount of any restrictions already made (CTA09/S367);
  • reduces a group relief claim of any period by the amount of impairment debits brought into account in all previous periods (CTA09/S368); and
  • carries forward group relief where it exceeds the impairment debits (CTA09/S369).

The rules in CTA09/PT5/CH7 take into account the impairment debits in respect of all loans made to the consortium company by any group members, not just the consortium member, and all amounts of group relief claimed from the consortium company by any group company, not just the consortium member.

The combined effect of these rules is that cumulative impairment debits and group relief given in total is unlikely, over time, to exceed the greater of either impairment debits or group relief claims.

The rules also ensure that impairment debits are restricted rather than group relief. Group relief is something a company can decide to claim or not to claim, so it can to some extent avoid or control the amount of any impairment restrictions by managing its claims to group relief.