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Bad debt and connected companies

Am I right in thinking there is no bad debt relief in this scenario?

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Company A has traded for some years, 100% owned by director X

Company B is formed, 100% owned by director X

Company A does consultancy work for B to get it set to trade, bills B and pays CT accordingly. Company B does not pay because it has no revenue stream.

In the meantime director X gives 50% of shares to new director Z to market the services. Still company B does not trade and it is decided in time that company B will not trade.

Company A wishes to write off the debt and claim relief. My concern is that as connected companies there is no relief if treatment is under loan relationship rules per CTA09/PT6. Do you agree or what is it I am missing?

Thank you.

 

Replies (18)

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By Portia Nina Levin
28th Aug 2018 13:14

From memory, if the debt arose while the companies were connected (X owning 100% of both), then you are correct that you cannot get relief.

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Replying to Portia Nina Levin:
By Ruddles
28th Aug 2018 13:41

Agreed - sort of. The point, though, is not whether the debt arose when the companies were connected but whether the impairment arose during that time - if the debt was otherwise fully recoverable at the time of cessation of connection (which does not appear to be the case here) then a later debit would be allowed - subject to the unallowable purpose rule (which wouldn't appear to be in point here).

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By Ruddles
28th Aug 2018 14:29

The other point to consider is of course whether the companies are still connected. Is there a shareholder/director agreement and/or provision in the Articles of B giving X a casting vote in event of deadlock?

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Replying to Ruddles:
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By andy.partridge
28th Aug 2018 14:24

No wriiten agreement or provision.

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Replying to Ruddles:
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By andy.partridge
28th Aug 2018 17:15

I wonder how relevant that is, given that the trading position of B and so the likelihood of meeting the debt to A is unchanged over the various snapshots in time - when B was billed, when the second shareholder/director arrived on the scene and present day?

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Replying to andy.partridge:
By Ruddles
28th Aug 2018 18:01

It’s probably of little relevance in this case, although determining whether the debt was impaired at any given point in time does require some thought. A continuing connection would put the matter beyond doubt with no thought required.

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ALISK
By atleastisoundknowledgable...
28th Aug 2018 18:02

Has B submitted a CT600?

Hopefully my logic follows ...

There is no bad debt relief as it would be double relief (ie B has already claimed the expense as a deduction). If B hasn’t claimed the deduction, then no double relief is possible.

QED bad debt relief allowable.

Acknowledge is more of a logic point than a rule point, and tax rules don’t always fall within the boundaries of logic, but ... ... worth a go?

Interesting to hear other’s views.

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Replying to atleastisoundknowledgable...:
By Ruddles
28th Aug 2018 18:07

Your logic is quite unsound. The rules for connected/unconnected LRs are clear - the treatment has nothing to do with whether or not B has already claimed a deduction for the expense.

Even if B had claimed a deduction it doesn’t necessarily follow that relief for A would result in double relief - what about the taxable credit in B? (subject to exemption for companies in distress)

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Replying to Ruddles:
ALISK
By atleastisoundknowledgable...
28th Aug 2018 18:16

The logic behind blocking tax relief had been explained to me (on AWeb, can’t remember who was the guilty party) as it would be a double relief for the reason I mentioned. Hence the starting point of my thoughts.

Also, if B is dissolved without w/b the expense, then there would be no taxable credit.

I was just wondering aloud as to whether it would be worth an argument... you’re clearly on the ‘no’ side of the fence. I reckon whilst Andy is a ‘no’, he’s on tiptoes and wants an excuse to jump over to the ‘yes’ Side.

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Replying to atleastisoundknowledgable...:
By Ruddles
28th Aug 2018 18:26

If B were to be dissolved without properly accounting for a taxable credit that is quite a separate matter and wouldn’t disturb the treatment of the debit in A.

Remember also that it would be quite permissible for A to recognise a deductible impairment in appropriate circumstances without B having to recognise a corresponding credit.

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Replying to Ruddles:
ALISK
By atleastisoundknowledgable...
28th Aug 2018 20:44

Ruddles wrote:

Remember also that it would be quite permissible for A to recognise a deductible impairment in appropriate circumstances without B having to recognise a corresponding credit.

What would those circumstances be?

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Replying to atleastisoundknowledgable...:
By Ruddles
28th Aug 2018 21:37

Simples.

A thinks that B will be unable to pay its debt and so recognises an impairment loss. Provided that A is/was not connected with B and the unallowable purpose rule does not apply a deduction should be available to A.

However, whilst there is a chance that B might be able to make good its debts A does not formally release the debt, meaning that B does not need to recognise a credit. It’s a fairly common scenario so I’m surprised that you haven’t come across it.

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Replying to Ruddles:
ALISK
By atleastisoundknowledgable...
28th Aug 2018 21:55

I was thinking (hoping) that you had something that worked for connected companies.

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Replying to atleastisoundknowledgable...:
By Ruddles
28th Aug 2018 22:05

I do - CTA 2009 s357

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Replying to Ruddles:
ALISK
By atleastisoundknowledgable...
28th Aug 2018 22:30

Ruddles wrote:

I do - CTA 2009 s357

For all intensive purposes, no then.

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Replying to atleastisoundknowledgable...:
By Ruddles
28th Aug 2018 22:38

What’s an intensive purpose?

I’m not sure what you were expecting. It’s a well-established principle that impairment losses between connected companies are generally disregarded. There’s nothing unfair or illogical about the principle. It follows that any exceptions are going to be limited in application.

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Replying to Ruddles:
ALISK
By atleastisoundknowledgable...
28th Aug 2018 22:56

I always live in hope that I might learn something new/special/useful that I’ve kissed during conversations with my (tax) betters ... same goes for conversations with you.

;D

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Replying to atleastisoundknowledgable...:
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By andy.partridge
28th Aug 2018 20:53

Not looking for excuses, just hoping I was wrong. I appreciate tax isn’t ‘fair’ and here is an example, the outcome of which, a typical client would neither expect nor understand.

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