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Loan written off - correct tax treatment?

Hi,

Ltd Co A owed Ltd Co B £ 20k. Common directorships in both companies. Company B ceases to trade, so loan written off - £ 20k credit to PL a/c

However, I am correct in that this £20k should be chargeable to CT?

Looking at CTA 2010 s99, Pt5 Ch16 s574 states  in relation to a loss incurred:

Relief may not be claimed for loans written off if the borrower and lender are 'connected persons'.

Would appreciate any thoughts if I have missed something?

Lorraine

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By BKD
23rd Nov 2011 13:51

Forget about the directors - for now

Who owns the shares in the companies?

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By murphy1
23rd Nov 2011 15:21

Directors are the only shareholders

 

 

Should have clearly stated that this is a husband and wife with 50 50 shareholding in each company.

 

Lorraine

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Agree with BKD

Common directorship is not at issue.  The companies will have a "connected companies relationship" if they are under common control or if one controls or has a major interest in the other.

If that is the case, the creditor party with a debit is not entitled to tax relief on the debit.

The position for the debtor party with the credit is less clear.  S.358 CTA 2009 says that a credit arising on release of a debt is generally not taxable.  Many commentators consider that that requires a formal release (that I believe needs to be made by deed).

Under the predecessor legislation, I have however had HMRC agree that on an inter-company write off between connected companies there is no tax effect for either party.

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By murphy1
23rd Nov 2011 15:23

Thanks Steve - given that one of the companies is now disolved, could I still argue that to be the case?

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You can only try

I'd mark up your comps to suggest that S.358 applies, so that the credit isn't taxable and then see if HMRC argue the point.  Your client needs to be aware that HMRC do have a potential argument that it's taxable, but it's far from clear how formal a release needs to be, so it's a tenable filing position.

If HMRC pursue the point, another angle may be to argue that there wouldn't even be a loan between the companies if they weren't connected and therefore the taxable credit should be reduced to nil by virtue of S.174 TIOPA (transfer pricing corresponding adjustment).  Not sure how successful that would be though. It is somewhat tenuous.

 

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By blok
23rd Nov 2011 16:58

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These companies are not under the control of the same person. singular . we have a case like this before . i then suggested that a minute of agreement showing that in the event of deadlock husband has deciding vote in both companies . or transfer a share and then formally release.

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@blok

Whilst I agree that the use of the word person in S.835 CTA 2009 can only be construed in the singular in the context of the subsequent '("A")', the definition of 'control' in S.836 and it's reference to S.838 (specifically S.838(4) which attributes the rights of persons connected with person A), mean that both companies are already under the same control (of both H & W) in this situation.

I agree that a formal release would be ideal, but fear that it may be too late now that the creditor company appears to have been dissolved.

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By blok
24th Nov 2011 17:27

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I took the opportunity to ask for non statutory ruling on this point a few months ago. hmrc are adamant that in the circumstances of the op the companies are not controlled by the same person and this is not a tax neutral transaction. Seems quite strange but that's the opinion of the officer who replied .

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By BKD
24th Nov 2011 22:40

What has s835 got to do with the question?

Answer - nothing. s835 deals with control in the context of intangible fixed assets. Control for loan relationship purposes is defined at s472 - it is a widely known point (or I thought it was) that there is no attribution of rights for LR pusposes.

If you want to argue that "person" should include"persons", a better course of attack might be to refer to the Interpretation Act. And I would certainly do so if it would give a better result for my client. (But hoping that I wasn't dealing with the same Inspector that had confirmed in another client's case, as was the case with blok, that singular means singular :)

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11th Jun 2014 18:43

See CFM35120
Control by more than one person

Following section 6(c) of the Interpretation Act 1978 we accept that the word ‘person’ can include ‘persons’. But such persons will only meet the requirements of the legislation if together they can secure that the company’s affairs are controlled in accordance with their wishes. Whether this exists will be a question of fact in all cases. For example, there could be an oral or written agreement always to vote together, or the intention could be implied by the relationship between the parties. 

http://www.hmrc.gov.uk/manuals/cfmmanual/cfm35120.htm

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