Corporation Tax Act 2009

Chapter 6 U.K. Connected companies relationships: impairment losses and releases of debts

Modifications etc. (not altering text)

C1 Pt. 5 Chs. 6-8 modified (with effect in accordance with s. 1184(1) of the amending Act) by Corporation Tax Act 2010 (c. 4), ss. 601, 1184(1) (with Sch. 2)

C2 Pt. 5 applied (with modifications) (with effect in accordance with s. 1184(1) of the amending Act) by Corporation Tax Act 2010 (c. 4), ss. 990(5), 1184(1) (with Sch. 2)

C3 Pt. 5 modified (with effect in accordance with s. 148 of the amending Act) by Finance Act 2012 (c. 14), s. 88(1)(2)(7) (with s. 147, Sch. 17)

Introduction U.K.

353 Introduction to Chapter U.K.

(1) This Chapter contains rules about impairment losses and releases of debts in the case of companies connected with other companies.

(2) In particular, see—

(a) sections 354 to 357 (which prevent debits in respect of impairment losses and release debits from being brought into account in the case of connected companies relationships, subject to some exceptions),

(b) sections 358 to 360 (which exclude credits in respect of the release of debts or the reversal of impairments from being brought into account in that case,[F1 subject to some exceptions]), and

(c) sections 361 to 363 (which treat debt releases as occurring when impaired debts become held by companies which might otherwise benefit from the exclusion under section 358).

F2 (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(4) Section 466 (companies connected for an accounting period) applies for the purposes of sections 354 to 360.

(5) For the circumstances in which companies are connected for sections 361 and 362, see section 363.

(6) For the meaning of “impairment loss [F3 and release debit]” see section 476(1).

Textual Amendments

F1 Words in s. 353(2)(b) substituted (with effect in accordance with Sch. 15 para. 3(2) of the amending Act) by Finance Act 2010 (c. 13), Sch. 15 para. 2(2) (with Sch. 15 para. 4)

F2 S. 353(3) omitted (22.4.2009 retrospective) by virtue of Finance Act 2009 (c. 10), s. 42(2)(a)(12)

F3 Words in s. 353(6) inserted (22.4.2009 retrospective) by Finance Act 2009 (c. 10), s. 42(2)(b)(12)

Exclusion of debits for impaired or released connected companies debts U.K.

354 Exclusion of debits for impaired or released connected companies debts U.K.

(1) The general rule is that no impairment loss or release debit in respect of a company's creditor relationship is to be brought into account for the purposes of this Part for an accounting period if section 349 (application of amortised cost basis to connected companies relationship) applies to the relationship for the period.

(2) That rule is subject to—

(a) section 356 (swapping debt for equity), and

(b) section 357 (insolvent creditors).

(3) Nothing in this section affects the debits to be brought into account for the purposes of this Part in respect of exchange gains or losses arising from a debt.

355 Cessation of connection U.K.

(1) This section applies if, in the case of a creditor relationship of a company—

(a) an impairment loss or release debit is excluded by section 354 from being brought into account for any accounting period, and

(b) there is a later accounting period for which the creditor relationship in respect of the debt is not a connected companies relationship.

(2) So far as any amount represents the impairment loss or release debit, no debit may be brought into account in respect of it—

(a) for the first accounting period within subsection (1)(b), or

(b) for any subsequent such accounting period.

356 Exception to section 354: swapping debt for equity U.K.

(1) An impairment loss or release debit in relation to a liability to pay any amount to a company (“the creditor company”) under its creditor relationship is not prevented from being brought into account by section 354 if conditions A, B and C are met.

(2) Condition A is that the creditor company treats the liability as discharged.

(3) Condition B is that it does so in consideration of—

(a) any shares forming part of the ordinary share capital of the company on which the liability would otherwise have fallen, or

(b) any entitlement to such shares.

(4) Condition C is that there would be no connection between the two companies for the accounting period in which the consideration is given if the question whether there is such a connection were determined by reference only to times before the creditor company—

(a) acquired possession of the shares, or

(b) acquired any entitlement to them.

357 Exception to section 354: insolvent creditors U.K.

(1) An impairment loss or release debit is not prevented from being brought into account by section 354 in relation to an amount accruing to a company (“the creditor”) if—

(a) condition A, B, C, D or E is met in relation to the creditor, and

(b) the amount accrues to the creditor at a time which is the relevant time for the condition in question.

(2) Condition A is that the creditor is in insolvent liquidation, and for this condition the relevant time is any time in the course of the winding up.

(3) Condition B is that the creditor is in insolvent administration, and for this condition the relevant time is any time in the course of the administration.

(4) Condition C is that the creditor is in insolvent administrative receivership, and for this condition the relevant time is any time when the appointment of the administrative receiver is in force.

(5) Condition D is that an appointment of a provisional liquidator is in force in relation to the creditor under section 135 of the Insolvency Act 1986 (c. 45) or Article 115 of the Insolvency (Northern Ireland) Order 1989 (S.I. 1989/2405 (N.I. 19)), and for this condition the relevant time is any time when the appointment is in force.

(6) Condition E is that under the law of a country or territory outside the United Kingdom, circumstances exist corresponding to those described in condition A, B, C or D, and for this condition the relevant time is any time corresponding to that described in the case of the condition in question.

(7) Section 323 applies for interpreting this section as it applies for interpreting section 322(6).

Exclusion of credits for connected companies debts on release or reversal of impairments U.K.

358 Exclusion of credits on release of connected companies debts: general U.K.

(1) This section applies if—

(a) a liability to pay an amount under [F4 a debtor relationship of a company (“D”) is released, and]

(b) the release takes place in an accounting period for which—

(i) an amortised cost basis of accounting is used in respect of the relationship, and

(ii) the relationship is a connected companies relationship.

(2) [F5 D] is only required to bring a credit into account in respect of the release for the purposes of this Part if

[F5 (a) it is a deemed release, or

(b) it is a release of relevant rights.]

(3) In subsection (2) “deemed release” means a release which is deemed to occur because of—

(a) section 361 (acquisition of creditor rights by connected company at undervalue), or

(b) section 362 (parties becoming connected where creditor's rights subject to impairment adjustment).

[F6 (4) For the purposes of this section “relevant rights” means rights of a company (“C”) that—

(a) were acquired by C in circumstances that, but for the application of the corporate rescue exception or the debt-for-debt exception, would have resulted in a deemed release under section 361(3), or

(b) were acquired by another company in such circumstances and transferred to C by way of an assignment or assignments.

(5) The amount of the credit that D is required to bring into account in respect of a release of relevant rights is—

(a) the amount of the discount received on the acquisition, less

(b) the sum of any credits brought into account in respect of that amount (whether in the accounting period in which the release takes place or in a previous accounting period) by C or, in a case within subsection (4)(b), by the company that acquired the rights or any company to which the rights were subsequently assigned.

(6) A reference in subsection (5) to the amount of the discount received on the acquisition is to the amount that would have been treated as released under section 361(4) on the acquisition, but for the application of the corporate rescue exception or the debt-for-debt exception.]

Textual Amendments

F4 Words in s. 358(1)(a) substituted (with effect in accordance with Sch. 15 para. 3(3) of the amending Act) by Finance Act 2010 (c. 13), Sch. 15 para. 2(3)(a) (with Sch. 15 para. 4)

F5 Words in s. 358(2) substituted (with effect in accordance with Sch. 15 para. 3(3) of the amending Act) by Finance Act 2010 (c. 13), Sch. 15 para. 2(3)(b) (with Sch. 15 para. 4)

F6 S. 358(4)-(6) inserted (with effect in accordance with Sch. 15 para. 3(3) of the amending Act) by Finance Act 2010 (c. 13), Sch. 15 para. 2(3)(c) (with Sch. 15 para. 4)

Modifications etc. (not altering text)

C4 S. 358 excluded by 2010 c. 4, s. 814D(10) (as inserted (with effect in accordance with Sch. 29 para. 51 of the amending Act) by Finance Act 2013 (c. 29), Sch. 29 para. 2)

359 Exclusion of credits on release of connected companies debts during creditor's insolvency U.K.

(1) This section applies if—

(a) a liability to pay an amount under a company's debtor relationship is released,

(b) the release takes place in an accounting period for which an amortised cost basis of accounting is used in respect of that relationship,

(c) condition A, B, C, D or E in section 357 is met in relation to the company releasing the amount,

(d) immediately before the time when the condition in question was first met the relationship was a connected companies relationship, and

(e) immediately after that time it was not such a relationship.

(2) The company is not required to bring into account a credit in respect of the release for the purposes of this Part.

360 Exclusion of credits on reversal of impairments of connected companies debts U.K.

(1) If an impairment loss is prevented from being brought into account by section 354, no credit in respect of any reversal of the impairment may be brought into account for the purposes of this Part.

(2) Nothing in this section affects the credits to be brought into account for the purposes of this Part in respect of exchange gains or losses arising from a debt.

Deemed debt releases on impaired debts becoming held by connected company U.K.

361 Acquisition of creditor rights by connected company at undervalue U.K.

(1) This section applies if—

(a) a company (“D”) is a party to a loan relationship as debtor,

(b) another company (“C”) becomes a party to it as creditor,

(c) immediately after it does so C and D are connected,

(d) in a case where the person from whom C acquires its rights under the loan relationship is a company, in the period of account in which C acquires them there is no connection between C and that company,

(e) the amount or value of any consideration given by C for the acquisition is less than the pre-acquisition carrying value (see subsection (5)), and

[F7 (f) no relevant exception applies.]

[F8 (2) In subsection (1) “relevant exception” means—

(a) the corporate rescue exception (see section 361A),

(b) the debt-for-debt exception (see section 361B), or

(c) the equity-for-debt exception (see section 361C).]

(3) C is treated as releasing its rights under the loan relationship when it acquires them.

(4) The amount treated as released is the amount of the difference referred to in subsection (1)(e).

(5) In subsection (1)(e) “the pre-acquisition carrying value” means the amount which would be the carrying value of the liability under the loan relationship in D's accounts if a period of account had ended immediately before C became a party to it.

(6) For the purposes of subsection (5) the carrying value is determined taking no account of—

(a) accrued amounts, or

(b) amounts paid or received in advance.

Textual Amendments

F7 S. 361(1)(f) substituted (with effect in accordance with Sch. 15 para. 3(2) of the amending Act) by Finance Act 2010 (c. 13), Sch. 15 para. 2(4)(a) (with Sch. 15 para. 4)

F8 S. 361(2) substituted (with effect in accordance with Sch. 15 para. 3(2) of the amending Act) by Finance Act 2010 (c. 13), Sch. 15 para. 2(4)(b) (with Sch. 15 para. 4)

Modifications etc. (not altering text)

C5 S. 361(1)(a)-(c) modified (17.7.2012) by Finance Act 2012 (c. 14), s. 23(8)-(12)

[F9 361A The corporate rescue exception U.K.

(1) For the purposes of section 361, the “corporate rescue exception” applies if—

(a) the acquisition is an arm's length transaction,

(b) there has been a change in the ownership of D at any time in the period beginning one year before, and ending 60 days after, the date of the acquisition,

(c) it is reasonable to assume that, but for the change in ownership, D would, within one year of the date of the change of ownership, have met one of the insolvency conditions, and

(d) it is reasonable to assume that, but for the change in ownership, the acquisition would not have been made.

(2) Subject to subsection (3), section 769 of ICTA (rules for ascertaining change in ownership of company) applies for the purpose of construing a reference in this section to a change in the ownership of a company.

(3) A reference in this section to a change in the ownership of a company, in the case of a company that is a building society, is a reference to—

(a) an amalgamation of two or more building societies under section 93 of the Building Societies Act 1986,

(b) a transfer of all the engagements of one building society to another under section 94 of that Act, or

(c) a transfer of the whole of the business of a building society to a company under section 97 of that Act.

(4) Sections 322(6) and 323 (insolvency conditions) apply for the purposes of this section.

Textual Amendments

F9 Ss. 361A-361C inserted (with effect in accordance with Sch. 15 para. 3(2) of the amending Act) by Finance Act 2010 (c. 13), Sch. 15 para. 2(5) (with Sch. 15 para. 4)

361B The debt-for-debt exception U.K.

(1) For the purposes of section 361, the “debt-for-debt exception” applies if condition 1 or 2 is met.

(2) Condition 1 is that—

(a) the acquisition is an arm's length transaction,

(b) the rights that are acquired are rights under a loan relationship that is represented by a security (“the old security”),

(c) the consideration given by C for the acquisition consists only of a security (“the new security”) representing a loan relationship to which C is a party as debtor, and

(d) the new security—

(i) has the same nominal value as the old security, and

(ii) at the time of the acquisition, has substantially the same market value as the old security.

(3) Condition 2 is that—

(a) the acquisition is an arm's length transaction,

(b) the rights that are acquired are rights under a loan relationship that is represented by an asset other than a security (“the old unsecured loan”),

(c) the consideration given by C for the acquisition consists only of an asset other than a security (“the new unsecured loan”) representing a loan relationship to which C is a party as debtor, and

(d) the amount of the new unsecured loan, and its terms, are substantially the same as those of the old unsecured loan.

(4) In this section “market value” has the same meaning as in TCGA 1992 (see sections 272 and 273 of that Act).

(5) In determining for the purposes of this section the market value of a security in a case in which the security represents a loan relationship to which section 415 (loan relationships with embedded derivatives) applies, rights or liabilities within subsection (1)(b) of that section are to be treated as comprised in the loan relationship.

Textual Amendments

F9 Ss. 361A-361C inserted (with effect in accordance with Sch. 15 para. 3(2) of the amending Act) by Finance Act 2010 (c. 13), Sch. 15 para. 2(5) (with Sch. 15 para. 4)

361C The equity-for-debt exception U.K.

(1) For the purposes of section 361 the “equity-for-debt exception” applies if the following two conditions are met.

(2) The first condition is that the acquisition is an arm's length transaction.

(3) The second condition is that the consideration given by C for the acquisition consists only of—

(a) shares forming part of the ordinary share capital of C,

(b) shares forming part of the ordinary share capital of a company connected with C, or

(c) an entitlement to shares within paragraph (a) or (b).]

Textual Amendments

F9 Ss. 361A-361C inserted (with effect in accordance with Sch. 15 para. 3(2) of the amending Act) by Finance Act 2010 (c. 13), Sch. 15 para. 2(5) (with Sch. 15 para. 4)

362 Parties becoming connected where creditor's rights subject to impairment adjustment [F10 etc] U.K.

(1) This section applies if—

(a) a company (“D”) is a party to a loan relationship as debtor, [F11 and]

(b) another company (“C”) which—

(i) is a party to the loan relationship as creditor, and

(ii) is not connected with D,

becomes connected with D, F12 ...

F13 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(2) C is treated as releasing its rights under the loan relationship when C and D become connected.

[F14 (3) The amount treated as released is the amount (if any) by which the pre-connection carrying value in D's accounts exceeds the pre-connection carrying value in C's accounts.

(4) In subsection (3)—

• “the pre-connection carrying value in D's accounts” means the amount that would be the carrying value of the liability representing the loan relationship in D's accounts if a period of account had ended immediately before C and D became connected, and

• “the pre-connection carrying value in C's accounts” means—

  (a)

  in any case where C was a party to the loan relationship as creditor on the last day of the period of account ending immediately before the one in which C and D became connected, the cost of the asset representing the loan relationship which would be given on that day on an amortised cost basis of accounting, and

  (b)

  in any other case, the amount or value of any consideration given by C for the acquisition of the asset representing the loan relationship.]

(5) For the purposes of subsection (4) [F15 no account is to be taken of—]

(a) accrued amounts, [F16 or]

(b) amounts paid or received in advance, F17 ...

F17 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Textual Amendments

F10 Word in s. 362 heading inserted (with effect in accordance with s. 23(4) of the amending Act) by Finance Act 2012 (c. 14), s. 23(2)(d)

F11 Word in s. 362(1)(a) inserted (with effect in accordance with s. 23(4) of the amending Act) by virtue of Finance Act 2012 (c. 14), s. 23(2)(a)(ii)

F12 Word in s. 362(1)(b) omitted (with effect in accordance with s. 23(4) of the amending Act) by virtue of Finance Act 2012 (c. 14), s. 23(2)(a)(ii)

F13 S. 362(1)(c) omitted (with effect in accordance with s. 23(4) of the amending Act) by virtue of Finance Act 2012 (c. 14), s. 23(2)(a)(i)

F14 S. 362(3)(4) substituted (with effect in accordance with s. 23(4) of the amending Act) by Finance Act 2012 (c. 14), s. 23(2)(b)

F15 Words in s. 362(5) substituted (with effect in accordance with s. 23(4) of the amending Act) by Finance Act 2012 (c. 14), s. 23(2)(c)(i)

F16 Words in s. 362(5)(a) inserted (with effect in accordance with s. 23(4) of the amending Act) by Finance Act 2012 (c. 14), s. 23(2)(c)(ii)

F17 S. 362(5)(c) and the word immediately preceding it omitted (with effect in accordance with s. 23(4) of the amending Act) by virtue of Finance Act 2012 (c. 14), s. 23(2)(c)(iii)

363 Companies connected for sections 361 [F18 to] 362 U.K.

(1) For the purposes of sections 361 [F19 to] 362 there is a connection between two companies at any time if condition A or B is met at that time.

(2) Condition A is that one company has control of the other.

(3) Condition B is that both companies are under the control of the same person (but see subsection (6)).

(4) For the purposes of sections 361 [F20 to] 362 there is a connection between two companies in a period of account if there is a connection between them (within subsection (1)) at any time in the period.

(5) Section 472 (meaning of “control”) applies for the purposes of this section.

(6) Condition B is not taken to be met just because two companies have been under the control of—

(a) the Crown,

(b) a Minister of the Crown,

(c) a government department,

(d) a Northern Ireland department,

(e) a foreign sovereign power, or

(f) an international organisation.

(7) Section 468 (connection between companies to be ignored in some circumstances) applies for the purposes of this section as it applies for the purposes of the provisions which apply section 466, taking references in sections 468 and 469 to the accounting period as references to the period of account.

(8) For the meaning of “international organisation”, see section 476(2) and (3).

Textual Amendments

F18 Word in s. 363 heading substituted (with effect in accordance with Sch. 15 para. 3(2) of the amending Act) by Finance Act 2010 (c. 13), Sch. 15 para. 2(6)(a) (with Sch. 15 para. 4)

F19 Word in s. 363(1) substituted (with effect in accordance with Sch. 15 para. 3(2) of the amending Act) by Finance Act 2010 (c. 13), Sch. 15 para. 2(6)(b) (with Sch. 15 para. 4)

F20 Word in s. 363(4) substituted (with effect in accordance with Sch. 15 para. 3(2) of the amending Act) by Finance Act 2010 (c. 13), Sch. 15 para. 2(6)(b) (with Sch. 15 para. 4)

Modifications etc. (not altering text)

C6 S. 363 applied (17.7.2012) by Finance Act 2012 (c. 14), s. 23(4)(b)

[F21 363A Arrangements for avoiding section 361 or 362 U.K.

(1) This section applies in any case where arrangements are entered into and the main purpose, or one of the main purposes, of any party in entering into them (or any part of them) is—

(a) to avoid an amount being treated as released under section 361 or 362, or

(b) to reduce the amount which is treated as released under section 361 or 362.

(2) The arrangements (or part of the arrangements) are not to achieve that effect (so that an amount, or a greater amount, falls to be treated as released under section 361 or 362).

(3) In this section “arrangements” includes any agreement, understanding, scheme, transaction or series of transactions (whether or not legally enforceable).]

Textual Amendments

F21 S. 363A inserted (with effect in accordance with s. 23(5)-(7) of the amending Act) by Finance Act 2012 (c. 14), s. 23(3)