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HMRC internal manual

Corporate Finance Manual

Old rules: loan relationships: connection and bad debts: becoming connected: Para 6B

Applying Para 6B

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

Para 6B(2) worked by disapplying para 6(3) (the provision which prevented companies from using the authorised arrangements for bad debt in para 5) where there was a loan relationship and

  • the companies became connected in an accounting period beginning on or after 1 October 2002
  • bad debt relief was given under para 5 in a previous accounting period when the companies were unconnected.

Para 6B(3) achieved this by assuming that the amount payable in respect of the creditor relationship, when the companies become connected, was

  • not the full amount payable, but instead was
  • equal to the pre-connection value.

This was the value of the debt in the accounts of the creditor company at the end of the accounting period preceding connection.

Applying para 6B: example

UJ Ltd had a 31 December accounting year. It made a loan to unconnected company BG Ltd of £10,000 on 1 January 2002, repayable in 5 years. BG Ltd got into difficulties and at 31 December 2003, UJ Ltd made a provision of £3,000 against the debt going bad. On 31 December 2004 it made a further provision of £2,000. On 1 March 2005 it bought a controlling shareholding in BG Ltd. In the year to 31 December 2005 it made a further provision of £4,000, and in the following year BG Ltd recovered and the whole of the debt was repaid.

Year Accounts Tax
31/12/2003 Dr £3,000 Debit £3,000
31/12/2004 Dr £2,000 Debit £2,000
31/12/2005 Dr £4,000 Debit nil - the parties were connected so no bad debt relief.
Credit nil - the pre-connection value of the debt was £5,000. This was treated as the full value of the debt so no write back was required.      
  31/12/2006 Cr £9,000 Credit £5,000 - the profit on redemption, being the amount recovered over and above the pre-connection value of the debt.