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HMRC internal manual

Corporate Finance Manual

Other tax rules on corporate finance: securitisation: periods beginning before 1 January 2005: bad and doubtful debts

Bad and doubtful debts

Securitisations, by their nature, require a reliable income stream - which in turn requires a reliable underlying asset base. The various credit enhancement structures employed in these deals - particularly over-collateralisation - should ensure that there is never a shortfall in funds for the SPV to pay the third party investors and the originator.

The return of profits to the originator, and the minimal retention of profits by the SPV, is calculated after bad debts, including provisions. Generally, it would be unusual to see any general bad debt provisions in an SPV, unless the method of calculating the originator’s return was adjusted for such general provisions, as in the normal course of events it will not have the funds to meet any additional tax liability.

The usual loan relationship rules on any bad and doubtful debts apply and bad debt provisions in securitisation SPVs should be dealt with like any other entity. The same is also true for the originating entity. It is possible that the originating entity may carry bad debt provisions for debts which it has securitised and thus no longer owns. This may be prudent and appropriate in accounting terms - particularly if the originator is required to replace non-performing debts as part of its credit enhancement mechanism (CFM72090).

In tax terms HMRC would not expect to see a bad debt relief claim by an originator once an asset had been disposed of in a true sale securitisation, if the SPV were also claiming relief for a provision in respect of the same loss. The SPV could be expected to show accounting provisions in respect of any losses in so far as the losses in question would ultimately be borne by the SPV itself. However, if (for example) the losses on the securitised assets would impact on the originator rather than on the SPV (for example, by reducing or eliminating flows of profit extraction from the SPV to the originator), it is possible that any related provisions would be allowable in the originator (and not in the SPV).