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bad debts
Thank you for this comment. I too have seen the Revenue try to assert that a long-outstanding trade debt is really funding (eg in the context of thin cap disputes) but my view is that such arguments are just wishful thinking on the Revenue's part and an example of their (sadly) increasingly prevalent "it's not fair" approach to tax - perhaps a further consequence of the pernicious idea of there being a 'right amount of tax'. Unless the directors change their view of the categorisation of the debt when they compile the financial statements (and I would even then strongly question whether their change of view would be enough to make it a 'transaction for the lending of money', and thus a LR, if it was not one originally) I would argue that the debt retains its original character through thick and thin as a matter of fact and law. It is a matter of common commercial experience that trade debts can remain outstanding for a long time and where the parties are connected then there is even more justification for leaving the debt outstanding in the hope that it will be paid; but that does not mean that they spontaneously metamorphose into funding debts. So I would argue that it's just a case of s.74(1)(j) for earlier years - and if the debt's bad, it's allowable - period.
'capitalisation' of debt
Very briefly off the top of my head - two potential problems, I'd have thought. First - have the shares 'become' of negligible value as the legislation requires - an interesting point but one that the Revenue routinely takes. Second - in many cases between trading companies, the substantial shareholdings exemption would make a negligible value claim impossible - but this is going off the point of the tip, really!
No problems last year?
I am not sure there would not have been a problem with this scenario last year. The subsidiary would still have been liable under s94 but the Revenue would have been likely to challenge bad debt relief in the parent company despite being outside the loan relationship rules. Often thes debts build up over a period and the Revenue argue it has ceased to be a simple trading debt and more a financing debt.
Insurmountable ?
So, is the problem insurmountable or could symmetry be created by changing the nature of the "write off", example as follows:
The parent subscribes for sufficient further shares in the sub to extinguish the interco debt. After a reasonable time, sufficient to conclude that the trading situation of the sub will not improve, the parent then subsequently makes a negligible value claim against the shares.
The sub avoids a tax liability on the write-off and the parent has the benefit of capital losses.
Comments appreciated.