Section 42: Release of Trade Etc Debts
Summary
1.Section 42 amends the legislation in Corporation Tax Act 2009 (CTA) on the loan relationships of companies. It ensures that where a company is released from a debt that it has incurred in the course of a trade or property business, the debt release is taxed under the rules for loan relationships rather than those for trading or property income. This means that if the debtor company is connected with the creditor (for example, if they are two companies in the same group), no tax charge arises on the debtor and there is no tax relief for the creditor. The change applies to debt releases occurring on or after 22 April 2009.
Details of the Section
2.Subsections (2) and (3) move the definition of a “release debit” from Chapter 6 of Part 5 of CTA (which deals with releases of debts between connected companies) to section 476 of CTA, which contains definitions that apply for the purposes of the loan relationships rules generally. This is necessary because the term is being applied more widely – it now also applies to debts that are taxed in the same way as loans.
3.Where a creditor company agrees to release a debtor from its liability to repay a loan or debt, the accounts of the creditor company will show a loss (if the company has not already written off the debt as bad). This loss is referred to as a “release debit”.
4.Subsection (4) introduces the main elements of the section. The new provision amends the rules on “relevant non-lending relationships” in Chapter 2 of Part 6 of CTA. A “relevant non-lending relationship” is a money debt that does not arise from the lending of money – trade debts are the most common example. Chapter 2 of Part 6 provides for the loan relationships rules (found in Part 5 of CTA) to apply to such debts in defined circumstances and to a defined extent: section 479 of CTA sets out the circumstances, and section 481 the extent.
5.Subsections (5) and (6) do two things. First, subsection (5) amends section 479(2)(c), which deals with the position of the creditor company. Section 479(2)(c) applies the loan relationships rules to an “impairment loss” on a money debt – where the creditor writes down a bad or doubtful debt. This means that the creditor does not get tax relief if it is connected with the debtor company. (Two companies are connected if one controls the other, or they are under common control.) The amendment puts it beyond doubt that section 479(2)(c) applies where a debt is released, as well as to an impairment loss.
6.Subsection (5) then adds a new circumstance in which the loan relationships rules will be applied to money debts. This is where a company is released from a debt in respect of which a “relevant deduction” has been allowed for tax purposes – in other words, it covers the position of the debtor company.
7.Subsections (8) to (11) amend section 481 of CTA, which sets out how the loan relationships rules apply to “relevant non-lending relationships”. In general, all the computational rules (including those relevant to connected companies) will apply, but only in relation to matters specified in section 481(3).
8.Subsection (9) therefore makes amendments to section 481(3) corresponding to those already made to section 479. It makes it clear that, for the creditor, the loan relationships rules apply to a “release debit” as well as to an impairment loss; and it adds a new paragraph which applies those rules to the company that has been released from the debt, provided it has previously had a “relevant deduction”.
9.Subsection (11) applies the definition of “relevant deduction” to section 481.
10.Subsection (12) is the commencement provision: the amendments will apply to all debt releases that take place on or after 22 April 2009.
Background Note
11.The purpose of this section is to correct an anomaly that resulted when impairment losses on trade (or property business) debts were brought within the loan relationships rules by Finance Act 2005. If a trade debt is released by a creditor that is connected with the debtor company, the creditor is denied tax relief under the loan relationships rules. The debtor, however, is still charged to tax under section 94 of CTA – part of the rules on taxation of trade and property income – unless the release is part of a statutory insolvency arrangement.
12.Representations made to the Government indicated that this mismatch was inhibiting group reorganisations being carried out, for example, as part of a merger or acquisition. Groups commonly plan to avoid the tax charge, but at the expense of increased administrative burden and costs.
13.The amendment works by applying the loan relationships rules to the debtor as well as to the creditor. In almost every case this has no effect where the two companies are not connected – in particular, the loan relationships rules continue to give relief to the debtor where the release is part of a statutory insolvency arrangement. But, where the parties are connected, the debtor’s “profit” is not taxed, making the transaction neutral in tax terms.
14.The one change affecting debt releases between unconnected companies is that, where the debtor is carrying on a UK property business, the profit will now be brought into account as a non-trading loan relationships credit, rather than as property income. This would affect the company’s ability to set off surplus property expenses, so that in a very small number of cases the company may be disadvantaged.
