Share this content
0
314

Insolvency and loan from related company

Didn't find your answer?

Search AccountingWEB

The mother company lent money to two companies in the same group (A and B) which had financial difficulties. (£200,000 to one company and respectively £100,000 to the other company).

Mother company: The father and the son are directors of the mother company, but only the son is the shareholder of this company.

Company A:  The son is the only director and shareholder

Company B:  The son is the only director, he has 1% of the company’s shares and the mother company has 99% of the shares.

These two companies (A and B) are now in liquidation.

My client is asking me if the mother company could take advance of the CGT relief since the mother company couldn’t recover the money lent to A and B.

I know is that due to the fact that the companies are related we cannot apply s253(4) CGT relief: loan to traders.

Looking at the HMRC manual it looks like we can apply CM 35140: Loan relationships: connected companies and impairment: exceptions: insolvent creditors

I will greatly appreciate if you could let me if the company could apply CM35140 or if there is any other HMRC legislation I am not aware of. I would like also to confirm with you the right tax treatment.

Many thanks in advance

Replies

Please login or register to join the discussion.

26th Mar 2019 09:54

Have the Liquidators confirmed no prospect of a dividend back to creditors?

Thanks (0)
avatar
to Insolvency Practitioner
26th Mar 2019 10:15

There are no dividends declared. The companies have losses and they cannot pay any other creditors.

Thanks (0)
26th Mar 2019 10:22

Have the Liquidators confirmed this? Have they completed their investigation/inquiries and dealt with all assets?

Thanks (0)
avatar
to Insolvency Practitioner
26th Mar 2019 10:43

Yes.

Thanks (0)
avatar
26th Mar 2019 13:32

Insolvent creditors? Don't you have insolvent debtors?

Thanks (0)
to Tax Dragon
26th Mar 2019 13:46

Indeed. But in any case Mother and B are probably not connected. (And Mother and and A are also unlikely to be connected.)

And, of course, section 253 of TCGA 1992 is of little relevance where debtor and creditor are both companies.

Thanks (0)
avatar
26th Mar 2019 14:17

I believe the companies are connected. The rule for determining if two companies are 'connected' with each other is that they will be connected if one of them has control of the other or if both are under the control of the same person or persons. The term 'control' is given the same meaning as in sections 450 and 451 of the Corporation Tax Act 2010. For this reason I believe we cannot apply section 253 of TCGA 1992. Can we calculate the impairment loss?

Thanks (0)
to SE_Confused
26th Mar 2019 16:15

You say that Mother is owned 100% by the son and B 99% by the mother. They are not, therefore, controlled by the same person (unless there is some governing document that says that they are). If you are trying to attribute rights of associates, please don't - you are referencing the wrong legislation, as 'control' for these purposes is defined at section 472 of CTA 2009.

You should note also that for loan relationship purposes the test is whether the companies are under control of the same person (singular) - although HMRC do accept/argue that 'person' can mean 'persons' in certain scenarios.

As I mentioned above, section 253 is of no relevance, whether or not the companies are connected, because we are discussing loan relationships.

As far as B is concerned, the impairment loss should be allowable, assuming that the unallowable purpose rule doesn't apply.

On the assumption that the son no longer has control of A following appointment of liquidator (which of course should also apply with B so my comments above may be somewhat academic) then Mother and A wouldn't be connected either. So the position is the same - impairment loss allowable subject to the unallowable purpose rule.

Thanks (0)
to Wilson Philips
26th Mar 2019 16:48

The son is the sole shareholder of the mother company, which is the 99% shareholder of B, the other 1% being owned by the son personally - there is no mother in the scenario, just the mother company. The son therefore directly or indirectly owns 100% of the share capital of both and they are under common control.

As you say though, it's somewhat academic once in liquidation.

Thanks (0)
to Duggimon
26th Mar 2019 17:11

Where is the red-faced emoji? For some reason I didn't see "company" after mother!

If I was going to be picky I'd say that Mother and A are (were) under common control of son whereas B is (was) under the control of Mother. Not that it changes the analysis in the slightest.

Thanks (0)
avatar
to Wilson Philips
26th Mar 2019 17:13

Made me smile :)

Same question to you re CFM35360.

Thanks (0)
to Tax Dragon
26th Mar 2019 19:21

My reading of that, and the underlying legislation, is that it prevents a deduction in a post-connection period for an impairment or release that arose (ie was recognised) in a period when they were connected.

What needs to be considered is whether the debt was impaired at the time of the liquidator’s appointment. It’s fair to say that it probably would have been. The question therefore is whether the accounts drawn up at that date, or indeed an earlier date, ought to have recognised the impairment to comply with GAAP. If not, my analysis stands. Otherwise, I am willing to reverse my conclusion.

Thanks (0)
avatar
to Wilson Philips
27th Mar 2019 13:51

I agree. The extract doesn't refer to it, but it must draw from the rule that the tax treatment of LRs follows GAAP even if the accounts don't. So it's not a matter of whether the impairment has been recognised - it's whether it should have been.

Thanks (0)
avatar
to Duggimon
26th Mar 2019 17:13

What do you make of HMRC’s comments in CFM35360?

Thanks (0)
Share this content