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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Old rules: loan relationships: authorised accounting methods: accruals basis: authorised arrangements for bad debt: ‘bad debt relief’

Bringing in debits under authorised arrangements for bad debt

This guidance applies to periods of account beginning before 1 January 2005

The provisions in FA96/SCH9/PARA5 require the creditor company to bring in debits to the extent that

  • a debt is a bad debt (Para 5(1)(a))
  • a doubtful debt is estimated to be bad (Para 5(1)(b))
  • a liability to pay any amount is released (Para5(1)(c).

These provisions apply equally to interest or other amounts payable under a loan relationship as it does to the underlying debt. This includes the principal of the debt, which before FA96 could only be relieved as an allowable loss under TCGA92 by companies that were not financial traders.

There are also restrictions on the amount of bad debt relief that consortium member companies or their fellow group members can claim - see CFM81300+.

Giving relief: bad debt

It is a question of fact whether a debt is bad. Although in contrast to ICTA88/S74(1)(j), which deals with bad debt in the context of non-corporates carrying on a trade, there is no requirement that the bad debt must be proved to be bad, the scope of the two provisions will be the same. Where a company writes off a debt in its accounts rather than merely providing against it, this suggests that it is in fact a bad, rather than just a doubtful, debt.

Giving relief: doubtful debt

Relief is due for a doubtful debt to the extent that it is estimated to be bad. A general provision is not allowable. Any provision against partial or complete irrecoverability must represent an estimate specific to the loan relationship and to the circumstances of the debtor.

Unpaid interest is a money debt due from the debtor company to the creditor company. It is not a loan relationship because there has been no lending of money in respect of this debt. It is, however, an ‘amount payable under a loan relationship’ and therefore comes into Para 5. If the creditor doubts that the interest will be paid then it can make a provision against interest receivable.

Giving relief - release of debt

Formal releases of debt are comparatively rare.

A debt is released only when the lender has waived the borrower’s obligation to repay. The writing off of a debt in a company’s accounts is not a release, because in that situation the borrower’s obligation to repay remains.

A release can be of the entire amount of the debt, or part of the debt. When the lender releases a debt, it ceases to be a party to the loan relationship. Its rights have been extinguished, so this is a related transaction (see CFM31140). However,

  • S85 still applies - the lender must assume that the amount is paid in full, but
  • Para 5(1)(c) requires a departure from this assumption

so a debit for amounts released, in full or in part, is in accordance with the authorised accruals basis.