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HMRC internal manual

Corporate Intangibles Research and Development Manual

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HM Revenue & Customs
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Core computational rules: deductible debits: general matters and adjustments for tax purposes: debt impairment losses and bad debts

CTA09/PART8/S869 (FA02/SCH29/PARA115)

Treatment of debt impairment losses and bad debts under the corporate intangibles regime is determined by whether they pre- or post-dates FA05:

  • periods of account beginning before 1 January 2005 - FA02/SCH29/PARA115 applies
  • periods of account beginning on or after 1 January 2005 but before 22 April 2009 - FA02/SCH29/PARA115 applies, as amended by FA05
  • periods of account beginning on or after 22 April 2009 - CTA09/PART8/S869 applies

Post-FA05 treatment

Approach

The only debits of this sort that may be brought into account for the purposes of SCH29/PART8 are those that arise by way of impairment loss on debts for matters within SCH29/PART8 or to the extent that a debt within SCH29/PART8 has been released as part of a statutory insolvency agreement.

Sums charged against profits by creditor company

An impairment loss is a debit in respect of the impairment of a financial asset. The term impairment loss comes from the International Accounting Standard IAS39, Paragraph 58 onward of this Standard provides rules for when an impairment should be recognised. Impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the debt (a ‘loss event’) and that loss event (or events) has an impact on the amount of the debt that can be reliably estimated.

Sums written back to profits by debtor company

Accounting gains relating to unpaid debts give rise to taxable credits within SCH29/PART8. This is subject to an exception where the creditor releases the debt as part of a statutory insolvency arrangement.

Pre-FA05 treatment

Approach

Generally debts are brought into account under Schedule 29 on the assumption that the amount will be paid in full when it becomes due.

The exceptions to this are where one of the following apply:

  • the debt is bad
  • the debt is estimated to be bad
  • the debt is released as part of a statutory insolvency agreement

Sums charged against profits by creditor company

A charge in a creditor company’s accounts for a bad debt only gives rise to a deductible debit under Schedule 29 to the extent that it is bad or estimated to be bad, subject to an exception for debts released as part of a statutory insolvency arrangement (such as a ‘voluntary arrangement’).

Sums written back to profits by debtor company

Paragraph 115 also deals with the position of a debtor company which has charged in its accounts, but not paid for, the sum due in respect of some service or facility it has enjoyed in relation to an intangible asset. Accounting gains relating to the unpaid debt (normally recognised because the creditor can no longer enforce recovery) give rise to taxable credits within Schedule 29. This is subject to an exception where the creditor releases the debt as part of a statutory insolvency arrangement.