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HMRC internal manual

Corporate Finance Manual

Deemed loan relationships: trade debts: releases between unconnected companies

Trade debt release where connected party rules do not apply

Where a creditor company releases a trade (or property business) debt owed by a person other than a connected company, the effect of applying the loan relationships rules will generally be that the debit shown in the company’s accounts is allowable for tax purposes. Conversely, for a debtor company, a credit that comes about in corresponding circumstances will in most cases be taxable.

But the exclusions in CTA09/S322 that apply where a loan relationship is released also apply to trade debts. Thus if the debt is released as part of a statutory insolvency arrangement, or the debtor issues shares to the creditor in consideration of the release, no credit is brought into account.


Maria trades on her own account as a management consultant. She employs an assistant, Winston. In 2007, she formed a limited company, in which she is the majority shareholder, to undertake particular consultancy projects. From time to time, Winston undertakes work for the company, for which Maria invoices the company at a commercial rate. In 2010, because of the company’s cash flow problems, Maria formally releases the company from the balance of £30,000 owing on these invoices.

The company’s accounts show a credit in respect of the debt release. Although Maria controls the company, CTA09/S358 does not apply - it will only apply where there is a ‘connected companies relationship’, and not where the creditor is a non-corporate. So the credit is taxable.

Maria may be able to claim as a trading expense for her ‘loss’, but will need to demonstrate that it was incurred wholly and exclusively for her sole trade.