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Finance Act 2012

Background Note

14.The rules that apply to loan relationships work on the principle that amounts taxed and relieved as credits and debits under those rules are  the profits and losses arising in accounts drawn up in accordance with generally accepted accounting practice. When a debt is impaired or written off by a creditor company its expense will normally be allowable as a loan relationship debit. When a debtor company is released from a debt it owes, its profit will be taxable as a loan relationship credit.

15.Where a debt exists between connected companies, such credits and debits are not normally brought into account for tax purposes. Specific rules prevent exploitation of this exception when debt is acquired by a new creditor connected to the debtor or when previously unconnected creditors and debtors become connected. This is achieved by imposing a deemed release on the debtor if the debt has been purchased at a discount by a connected creditor or the debt is impaired when the creditor and debtor become connected.

16.HM Revenue & Customs have become aware of arrangements that have been entered into to avoid the tax charge that would normally arise in these circumstances. The changes to the rules both prevent these and similar arrangements achieving this effect from 27 February 2012 and in relation to the particular arrangements retrospectively to 1 December 2011.

17.The calculation of the amount of a deemed release where unconnected parties to a loan relationship become connected was amended in response to comments on the draft legislation published on 27 February 2012. This change has effect from 1 April 2012.

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