Whilst I expect to find some clarification within my online textbooks ,as I have left the logins for these at home and this is not an area of tax I have had much exposure to, can anyone clarify control and Person position re the following?
Company L -Ord voting shares held 50% by F and 50% by D (individuals)
Company L has loan from Company M which itself has Ord voting shares held 50% by same F and 50% by same D (individuals- there are some prefs in issue held by them and their spouses E and B being 12.5% re each of F and D and 37.5% re each of the spouses, E and B)
The loan from M to L is significant for L, in fact it is L's only borrowing apart from loans from F and D.
CTA 2009 s466 refers to control by a "Person" not by Persons as follows:
------------------------------------------------------------------------------------------------
There is a connection between a company (“A”) and another company (“B”) for an accounting period if there is a time in the period when—
(a)A controls B,
(b)B controls A, or
(c)A and B are both controlled by the same person.
My gut feel is they ought to be connected but cannot currently locate definition that confirms this is the case.
I believe I need to determine control as I believe this is first step re determing tax treatment of a partial debt write off (L has sold its last asset and does not have enough funds to fully repay its loans from M,F and D) The required write off between companies L and M is circa £140,000 so given quantum I want to get this right.
Replies (2)
Please login or register to join the discussion.
Up the wrong tree it is you bark. - Yoda
Whilst it is likely that under the CTA 2010, s 450 definition of control, it seems likely that M controls L, by virtue of being entitled to all of L's assets on a winding up (L being insolvent, with less assets than the amount of the loan to M), that's not relevant.
For loan relationship purposes, the first step in determining the tax treatment of any formal release (or writing off) of the amount owed by M to L, is to establish whether the two companies have a connected companies relationship.
For that you ultimately look at the definition of control in CTA 2009, s 472 (s466, to which you refer, does mention it). And s 472 is a de facto control test. Can person A secure that the company's affairs are conducted in accordance with their wishes. Prima facie, company M is not such a person.
Person, can include persons though (Interpretation Act 1978), but HMRC only accept that inclusion if the two people act together. In the context of two companies owned 50:50 by the same individuals, where one company has lent funds to the other they might accept that they do. It's not guaranteed though.
https://www.gov.uk/hmrc-internal-manuals/corporate-finance-manual/cfm35120
However, if they are not connected L owes HMRC tax on any loan formally written off, and M gets a deduction. L doesn't have any money to pay such tax though.
If they are connected L doesn't owe any tax and M doesn't get any deduction. HMRC are, therefore, better off if they are connected.
Belt and braces, why not just impair the debt in M, and not claim tax relief, but never formally release the debt in L?