I have a situation that I need a quick answer for as I am too busy to research at the moment. I have a group of companies in which a subsidiary company (S) owes money to a parent company (P). The debt arose from a loan to S and increased due to trading between the compaies as well as interest being charged by P company to S on the outstanding loan.
S is not in a position to repay these loans and is in the process of being sold off. Therefore P has decided to waive the entire balance prior to the completion of the sale. S358 of Corporation Tax Act 2009 suggests that the write off of the loan in S will not be taxable. I would appreciate any comments on this point.
Thanks
AS
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Yes
Being too busy to research is the key to a successful accountancy practice with minimal PI claims.
Anyway, the normal treatment for intercompany loan write offs is that the credit is not taxable in one company, and the debit is not tax deductible in the other. If you adopt that treatment, then it seems very unlikely it will be challenged by HMRC since it is tax neutral - and it's what the legislation aims to achieve.
However, if you want to get very technical, then in theory it is possible that without a formal waiver (by deed) of the debt, then the credit could still be taxable even though the debit would be non-taxable. That point is set out in a recent article in Taxation, and makes interesting reading. As I say, I'm not sure HMRC would pursue the point, especially for a relatively small amount.
Are you sure though?
If you adopt that treatment, then it seems very unlikely it will be challenged by HMRC since it is tax neutral - and it's what the legislation aims to achieve.
So, you're suggesting that S can take a CT deduction for interest and trading items that are financed by way of debt to P. That debt can then be released without tax consequence and it's tax neutral?
There is nothing within the relevant non-lending relationship provisions that stops S.94 from applying, the provisions simply say that loan relationship rules apply to the debt, which means that any loan-relationship taxing or relieving provision has priority (by virtue of S.464 if no amount is brought into account under the loan-relationship rules then the rest of the legislation is free to bring such an amount into account). My reading is that where the loan relationships legislation doesn't tax the release (eg where the parties are connected), S.94 may very well do so. Otherwise, S.94 can never have any effect? So why's it still there?
I have to confess though, I'm not entirely sure, which is why I only say that the effect of S.94 needs to be considered. The amounts involved might make it a non-consideration.
Incidentally, HMRC's manuals at CFM41070 do accord with the view that it's not taxable. I still read the legislation as being capable of taxing it in these circumstances though, and one has to be mindful that HMRC often feel free to ignore their own guidance. I still don't understand why S.94 is still there, if it isn't to tax in these circumstances.
But
In the circumstances the OP describes, the effect of S.94 CTA 2009 needs to be considered.
No
In the circumstances the OP describes, the effect of S.94 CTA 2009 needs to be considered.
I don't agree. s94 requires that when a trade debt is released, the amount is treated as a receipt of the trade. FA 2009 changes mean that it would actually be taken into the loan relationship rules, provided the debt is correctly released, and therefore would be non-taxable.
Thanks for the comments.
Having carried out proper research (with a clear head this morning instead of late night), my opinion is that, as the debt is being released after 22 April 2009 and it is a formal release, the credit will now be tax free under normal loan relationship rules and will not be caught by s94 of CTA 2009.
I just need to do some more research to ensure that there is nothing that contradicts my opinion.
s94
It's true that since the FA 2009 changes the scope of s94 is very limited... in fact it's almost impossible to see how it might apply. But that was the intention of the FA 2009 changes - it just isn't fair to treat one side as taxable and the other side as non-deductible. It seems obvious to me that the tax treatment should have always been neutral - the s94 catch was always silly.
Incidentally, the loan relationship rules do take priority over s94 - I can find the statutory parts to support this, but not till Monday when I'm back in the office!
read further back...
and get very muddled! See CFM31040 just because a debt is inter company does not make it within the loan relationship rules - so CFM41070 seems a tad misleading and this is why you need to consider s94 after all.
The greater problem here is that nobody apparently knows what is a loan relationship, we have a court case coming the appeal court that might shed better light on things!
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