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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Deemed loan relationships: trade debts: releases where debtor and creditor are connected

Tax treatment where trade debts between connected companies are released

Releases of trade and property business debts are most likely to be encountered between companies within a group, for example as part of a group restructuring. Where the creditor and debtor are connected companies, the connected party rules will apply to the release. This means that the release debit in the creditor’s accounts will not be allowable, because of CTA09/S354. Similarly, the credit in the debtor company’s accounts will not be taxable, since CTA09/S358 applies, unless the release is a ‘deemed release’ as defined in CTA09/S358(3) (CFM35440) or a ‘release of relevant rights’ under CTA09/S358(4) (CFM35510).

Since the release is, for both parties, dealt with under loan relationships, the priority rule in CTA09/S464 means that the creditor’s loss cannot be claimed, nor the debtor’s profit taxed, under the normal provisions for trading income. Nor can the credit in the debtor’s accounts be taxed under CTA09/S94 (debts incurred and later released).

Trade debts or loans between companies within a group may not uncommonly be released when either the debtor or the creditor company (or both) is dormant, as part of a ‘tidying-up’ exercise to enable dormant companies to be struck off. If this is all that happens, HMRC would take the view that the recording of an accounts profit - which is not taxed - in a dormant debtor company does not result in that company starting to carry on a business, and therefore does not start an accounting period under CTA09/S9.

Where the creditor and debtor are not connected companies, see CFM41080.