MTT42040 - Particular entities and adjustments: Miscellaneous entities: Release of debt for companies in distress

Where a member of a group is in distress, and there are profits arising from a debt release reflected in its underlying profits, it may elect to exclude these profits when determining the adjusted profits. The election is set out in section 151 of Finance (No.2) Act 2023.

For a UK resident debtor company, this exclusion broadly aligns the treatment of the debt release for MTT purposes with the domestic corporation tax treatment.

See MTT21000+ for general guidance on determining the adjusted profits.

A section 151 election is an annual election. See MTT52200 for guidance on making elections.

Conditions

An election can be made to adjust the underlying profits in relation to profits arising from a debt release where one of the following circumstances, set out in section 151(2)(a)-(c) of F(No.2)A23, applies at the time of the debt release:

  • the member meets an insolvency condition set out at section 322(6)(a)-(e) of Corporation Tax Act 2009.
  • it is reasonable to suppose that within 12 months, ignoring any debts owed to connected persons and entities and the potential debt release itself, the member will be unable to meet its debts to unconnected persons and entities as they fall due, and the member has obtained independent expert opinion to confirm this is the case.
  • the member’s liabilities exceed its assets.

The origin of the obligation to pay the debt being released is not significant.

Where more than one debt is released at the same time, the debts released are to be treated as a single aggregate amount when determining whether each of the circumstances applies.

Connected-party debt

The release of a debt owed to a connected party can only benefit from an adjustment under section 151 where section 151(2)(a) or (b) applies (and in the case of (b), only where it is released as part of arrangement that also involves the release of a third-party debt). Section 151(5)(c) precludes any adjustment of profits in relation to the release of a debt owed to a connected party where section 151(2)(c) is in point.

Independent expert opinion

An independent expert opinion is an expert opinion that is provided by somebody other than the company itself, or its board members. For example, advice from an auditor that the company could not be signed off as a going concern would generally be sufficient.

Adjustment to underlying profits

Where the election is made, an amount of the profits arising from the debt release will be excluded from the underlying profits when determining the adjusted profits.

The amount that is excluded depends on which of the paragraphs of section 151(2) apply.

Adjustment to be made when section 151(2)(a) applies

Where section 151(2)(a) applies, an adjustment is made to exclude the full amount of the profits arising from the debt release.

Adjustment to be made when section 151(2)(b) applies but section 151(2)(a) does not

If section 151(2)(b) applies but section 151(2)(a) does not, an adjustment is made to exclude the full amount of the profits from the debt release, providing that:

  • the debt released was not owed to a person or entity that is connected to the member, or
  • the debt released was owed to a person or entity that is connected to the member, but:
    • the debt release can reasonably be regarded as part of arrangements to secure the solvency of the member, and
    • those arrangements involve the release of another debt that is owed to a person not connected to the member.

Note that in order for 151(2)(b) to have applied in the first place, it will be necessary for the company to have been likely to become insolvent within 12 months by reference to third party debts only. The provision then allows relief for third party debts, and connected party debts which are released as part of arrangements to secure the solvency of the company that also involve the release of a third party debt.

Note also that, although debts that are released simultaneously are to be treated as a single aggregate amount when assessing whether each circumstance applies, the debts are not to be so aggregated when determining any adjustment that is to be made.

Adjustment to be made when only section 151(2)(c) applies

Where only section 151(2)(c) applies, an adjustment is made to exclude the lesser of:

  • the amount of any profits arising as a result of the debt release,
  • the amount by which the member’s liabilities exceeded its assets immediately before the release if, as a result of the debt release, the member’s assets exceed its liabilities, and
  • the amount of profits arising from the debt release that are offset by local tax attributes when determining the member’s liability to tax, if any profits are so offset.

A local tax attribute is any tax attribute (including foreign tax credits) of the member that are recognised under the law of its territory. An attribute may be a local tax attribute even if it is excluded from the member’s covered tax balance.

Note that, although debts that are released simultaneously are to be treated as a single aggregate amount when assessing whether each circumstance applies, the debts are not to be so aggregated when determining any adjustment that is to be made.

Example

A Ltd has a debt to HoldCo Ltd of £10m. Both A Ltd and HoldCo Ltd are part of the ABC Group.

A Ltd also owes £20m to a third-party lender.

A Ltd has made substantial losses for the past two accounting periods. It is likely that, within 12 months, A Ltd will be unable to meet its debts to unconnected persons and entities as they fall due, ignoring the impact of connected party debts. The company’s auditor has confirmed this likelihood.

A Ltd does not meet one of the insolvency conditions in CTA09.

In order to secure the solvency of A Ltd, it negotiates a debt release from one of the third-party lenders.  As part of the same recapitalisation arrangements for A Ltd, Holdco Ltd releases the £10m it is owed by A Ltd.

If it so elects, A Ltd will exclude in full any profit arising from the debt release by HoldCo Ltd from its adjusted profits. This is because:

  • the circumstance in 151(2)(b) applies,
  • the circumstance in 151(2)(a) does not apply, and
  • although the debt released was owed to a connected person, it is part of an arrangement to secure the solvency of A Ltd,
  • that arrangement involved the release of a debt owed by A Ltd to an unconnected person.

Additionally, any profit arising from the debt release by the third party will also be excluded in full from the adjusted profits of A Ltd, because:

  • the circumstance in 151(2)(b) applies,
  • the circumstance in 151(2)(a) does not apply, and
  • the debt is to an unconnected person.