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HMRC internal manual

Corporate Finance Manual

Old rules: loan relationships: connection and bad debts: insolvent debtor

Debtor in liquidation

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

FA 2004 introduced some new rules on the taxation of an insolvent debtor company. These applied for releases on or after 10 December 2003. They provided that where the debtor company enters insolvency proceedings and it is not connected to the creditor company, it is not required to bring in any credit in respect of any release by the creditor - FA96/SCH9/PARA5(7).

The current guidance can be read at CFM35410.

Insolvency proceedings

These include a variety of situations, including provisional liquidation, administrative receivership and administration, and their equivalent in overseas law.


MN Ltd lent £30,000 on 1 August 2003 to another group company, GH Ltd, at annual interest of 10%. The whole group was in some financial difficulty and GH Ltd didn’t pay any interest. GH Ltd made up its accounts to 31 July each year and on 31 July 2004, MN Ltd released it from interest owed of £3,000. On 31 January 2005, GH Ltd went into insolvent liquidation and MN Ltd released the outstanding debt.

Where MN Ltd and GH Ltd continued to be connected after the insolvency proceedings started, GH Ltd was not required to bring in a credit for the amounts released (FA96/SCH9/PARA5(5)). Since the release took place after 1 October 2003, the same result was achieved by FA96/SCH9/PARA5(7) where MN Ltd and GH Ltd were no longer connected as a result of the insolvency proceedings.

There was also no tax charge for amounts released before the date of liquidation FA96/SCH9/PARA5(5).

Effect on creditor

If the creditor and debtor companies continued to be connected after the date of the debtor company’s insolvency proceedings, the tax treatment of any release followed the normal rules of loan relationships. Therefore the creditor could not depart from the assumption that all amounts would be paid in full (FA96/SCH9/PARA6)).

Where connection was severed as a result of the debtor company’s insolvency proceedings, the normal rules of loan relationships applied and the creditor company would have been able to obtain relief for bad debts.