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HMRC internal manual

Corporate Finance Manual

From
HM Revenue & Customs
Updated
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Old rules: loan relationships: connection and bad debts: disposal of debt

Adjusting the loss on disposal

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

The provisions in para 6(6) and (7) worked by comparing the

  • debits and credits that would have been brought into account under FA 1996 if there had been no disposal, and
  • the actual debits and credits brought into account under FA 1996.

For debits, the amount to be brought in was the smaller of the assumed or actual debit.

For credits, the amount to be brought in was the larger of the assumed or actual credit.

Adjusting loss on disposal: example

UJ Ltd made a loan of £10,000 to its subsidiary, BG Ltd, repayable in 5 years. In year 1, UJ Ltd wrote £2,000 off the loan as bad. In Year 2 it sold the loan to an unconnected company, Yoff Brokers Ltd, for £7,000.

Actual debits

In Year 1 the bad debt of £2,000 was disallowed under FA96/SCH9/PARA6(3). Debit nil.

In Year 2 the loss of £1,000 was a potential debit under FA96/S84.

Assumed debits (as if no disposal)

In Year 1 the bad debt of £2,000 was disallowed under FA96/SCH9/PARA6(3). Debit nil.

In Year 2 we would have assumed no disposal, so debit nil.

The assumed debit was smaller than the actual debit, so the amount to be brought into the accounts was nil.

Example 2

UJ Ltd made a loan of £10,000 to its subsidiary, BG Ltd, repayable in 5 years. In Year 1, UJ Ltd wrote £2,000 off the loan as bad. In Year 2 it released BG Ltd from its obligation to pay.

Actual debits

In Year 1 the bad debt of £2,000 was disallowed under FA96/SCH9/PARA6(3). Debit nil

In Year 2 the loss of £8,000 was a potential debit under FA96/S84, the release being a related transaction, but subject to Schedule 9. UJ Ltd was connected to the BG Ltd and had ceased to be a party to the loan relationship.

Assumed debits

In Year 1 the bad debt of £2,000 was disallowed under FA96/SCH9/PARA6(3). Debit nil.

In Year 2 we assumed no disposal, so debit nil.

The assumed debit was smaller than the actual debit, so the amount to be brought into the accounts was nil.

Disposal to group company

If the creditor company sold the loan to another group company, the provisions in FA96/SCH9/PARA12 that applied to group transfers had a similar effect. See CFM34000 for more on the current group continuity rules.