CFM81370 - Old rules: loan relationships: consortia and bad debts: effect of releases

Effect of releases

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

Where

  • all or part of a loan was released, and
  • the debtor company brought in the release as a taxable credit

then the equivalent amount written down by the creditor was not brought into account for the purposes of calculating the ‘relevant net debit’.

The credit was taxable unless the debtor company entered into insolvency proceedings (FA96/SCH9/PARA5(7)). This provision had effect in relation to any release made on or after 10 December 2003.

The debit for the release was provided for under the authorised arrangements for bad debt - FA96/SCH9/PARA5(1)(c).

Example

In CFM81350, in Year 1 Rewdon Manufacturing Ltd made a loan of £100,000 to Porwin Ltd. If, instead of writing it down to £40,000, Rewdon had formally released £60,000 of the debt, then

  • Porwin Ltd would have brought a credit of £60,000 into its accounts
  • Rewdon Manufacturing Ltd would nave obtained a debit of £60,000, and
  • there would be no ‘relevant net debit’.

This was because FA96/SCH9/PARA5A (15) excluded an amount equal to the amount credited (£60,000) from the computations of the relevant net debit. In other words, the debit for the amount released couldn’t be restricted.