The Chartered Institute of Taxation (CIOT) has submitted its comments to HMRC on draft legislation dealing with the release of trade debts, which was published in December 2008 for consultation.
Legislation, which previously gave relief where trade debts had become bad or doubtful, was repealed by Finance Act 2005. Where a company writes off a money debt that has arisen in the course of a trade, or a UK or overseas property business, the legislation now brings the debit in the company’s accounts into the ambit of the loan relationships rules (contained in FA 1996, Part 2, Chapter 4). The result is that where the creditor company is unconnected with the debtor, the creditor will get relief for the impairment, either as a trading expense or as part of a non-trading loan relationships deficit. HMRC state that they would also regard relief as being available if the debit arises from the creditor having formally released the debt. If, however, the creditor is connected with the debtor company (for example, they are companies within the same group), the rules means that no relief for impairment losses is available. Schedule 9, Paragraph 5ZA applies this to debt releases as well.
However, where a trade or property business debt is released, nothing in FA 1996, s. 100 bears on the debtor’s position. Even if the debtor is paying interest on the debt, or exchange differences arise, s. 100 only applies the loan relationships rules to the interest or the exchange differences. The normal principles for taxing trade or property income apply to the credit that will appear in the debtor’s accounts. This means that the debtor’s “profit” will be taxable, unless the release occurs as part of a statutory insolvency arrangement. It does not matter whether or not the debtor company is connected with the creditor.
Where a creditor releases a trade or property business debt owed by a connected debtor company, the creditor will get no tax relief but the debtor will be taxed. This mismatch can inhibit debt releases that might otherwise occur in group reconstructions, for example as a result of mergers of acquisitions. The purpose of the new draft legislation is therefore to remove this assymetry.
The CIOT has welcomed the proposed change, particularly in the current economic climate. It is possible that the existence of such inter-company indebtedness might prove an impediment to a rescue of an insolvent company, and the proposed relieving provision may well assist in preventing this.
The Institute notes however, that the rules are to take effect for accounting periods beginning on or after 1 April 2009 and is concerned that most retailers and financial traders have accounting periods which end before 1 April each year, and thus they would only come within the scope of this relieving measure, were it to be enacted in its current form, with effect from their first accounting period beginning in 2010.
As a very minimum, in order to ensure that this measure provides the greatest possible assistance for taxpayers, the CIOT has suggested that the starting date for this measure could be brought into line with the Corporation Tax Act 2009 (CTA 2009) (into which the new provisions are to be inserted). CTA 2009 comes into effect for accounting periods ending on or after 1 April 2009. Thus, there seems to be no reason why this relieving measure should be restricted to accounting periods beginning on or after 1 April 2009, as currently drafted. Rather, it could apply to accounting periods ending after 31 March 2009.
Ideally, the CIOT would like the relieving measure to take effect for all accounting periods that were current at the date that the draft legislation was published in December. This would be to enable retailers (and others) to take the benefit of this relieving measure in their 2009, as opposed to 2010, accounting period. Given that the measure is a relieving measure, the Institute does not consider that any objections would be raised were this approach to be adopted.
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Draft legislation on release of trade, etc debts: CIOT comments
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