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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Old rules: loan relationships: connection and bad debts: becoming connected

Previous bad debt relief

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

A company could only have bad debt relief under the authorised arrangements for bad debt in FA96/SCH9/PARA5(1) where there was no connection between the parties. The company had also to satisfy the conditions set out in para 5(2): that is, the company must bring in credits where bad debts previously allowed were

  • recovered, or
  • no longer attracted relief under FA96/SCH9/PARA5(1).

For example, where a company made a loan to an unconnected company, it could bring in debits under the authorised arrangements for bad debt in para 5. If the companies then became connected

  • the debt no longer attracted relief
  • the company had to assume that all amounts were payable and receivable in full.

The consequence was that, for tax purposes, the company had to write the debt back up to its full value. This resulted in a credit, effectively clawing back all bad debt relief given before connection.

FA96/SCH9/PARA6B(1)-(4) prevented this claw back if the connection started in an accounting period beginning on or after 1 October 2002, see CFM81190, though subsequent bad debt claims would not have been allowed because of the connection.


The company would have brought in credits for recoveries only where bad debt relief was previously given.


Where a debt was been released before the parties became connected, the creditor no longer had a legal entitlement to the loan relationship, so there were no consequences to becoming connected.