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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: acquiring bad debts: relief for acquired debt: examples

Amount of relief for bad debt: no relief for post-acquisition losses

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

Where the creditor company satisfied the conditions of para 6B(6), it did not have to bring in the purchase discount.

However, the company could get no further relief. Para 6B(7) achieved that by treating the amount paid for the debt as being the full amount repayable. No further debits would have been allowed where further amounts were

  • written down,
  • released, or
  • there are losses on disposal,

as these would have involved a departure from the assumption that all amounts treated as repayable would be repaid in full.

Any amounts the creditor received above the amount paid for the loan relationship would be brought in as a credit. These were profits on a related transaction under FA96/S84, and FA96/SCH9/PARA6(6) would have ensured that they are taxed.
 
Example: term loan

Assume, in the example below, that the conditions of para 6B(6) were satisfied.

GR plc bought XM Ltd, a struggling company. XM Ltd owed the bank £120,000 to be repaid in 3 years. As part of the deal, the bank assigned the loan to GR Ltd for payment of £60,000.

At the end of Year 2, GR estimated that £30,000 would be recoverable, and made a provision of £30,000. On redemption, XM Ltd repaid £25,000 in full and final settlement.

Year Accounts Tax Explanation
       
1 No credits or debits Cr nil Under para 6B(7), GR plc would have assumed that the full amount payable was the price paid, £60,000, and would not have to bring in the accrued purchase discount
2 Dr £30,000 Cr nil  
Dr nil As above
No bad debt relief as companies were connected, and that would be a departure from the assumption that £60,000 would be repaid in full      
  3 Dr £5,000 Dr nil
Cr nil Para 6(6) applied so that the loss on disposal was not brought in
 

Example: demand loan

GR plc bought XM Ltd, a struggling company. XM Ltd owed the bank £120,000, which should have been repaid 2 months ago. As part of the deal, the bank assigned the loan to GR Ltd for £60,000. In Year 2 GR Ltd formally waived the loan.

Year Accounts Tax Explanation
       
1 No debits or credits Cr nil Under para 6B(7), GR plc assumed that the full amount payable was the price paid, £60,000, and would not have to bring in the accrued purchase discount
2 Dr £60,000 Dr nil Para 6(6) applied so that the loss on disposal was not brought in