This is a simple topic for most of the businesses but has been presented by HMRC in a complex way.
Basically it’s about loans.
These rules covers the usual loans and also cases which are `deemed`. Whenever word `deemed` is used it means special cases specifically mentioned in legislation.
Recently I came across and very helpful webinar from BKL Tax (a tax consultancy), link below and I thought I should share it.
Some key points from the webinar:
• If a trade debt is released its taxable income. E.g. A Ltd sold £100 apples to B Ltd and later A Ltd forgave the trade debt for say bad debt. £100 will be taxable income for B Ltd.
• Interest expense deduction is taken on accrual basis not on paid basis. But there are some anti-avoidance rules around these – related parties beware!
• International accounting standard 23 and Loan relationships: Capitalised interest MUST be claimed in year interest arises (on accrual basis). CTA09 S 320
• Loan release not taxable in specific cases CTA09 S 322 :
1) Release is part of corporate insolvency
2) Consideration is inform of ordinary shares (debt re-structure in case lenders taking over a business)
3) Debtor company in insolvency/administration/liquidation etc.
• Pre trading LR rules also exist
Connected parties (CTA09 S466)
If companies are under the control of the same person – waivers among them are generally ignored for tax purposes i.e. for creditor company it will not be a tax deductible expenses and for debtor company it will not be a taxable income.
Webinar also mentions of a case where companies controlled by husband and wife are NOT connected. E.g. A ltd is 100% owned by Mr A and B Ltd is 100% owned by his wife Mrs B. A ltd and B Ltd are not connected. I think HMRC may challenge this.
Speakers also briefly mention Interpretation Act 1978 and its use in interpreting the term “same person”.
I recommend that you are interested please go to the webinar mentioned among above.