In our regular Q&A series from Croner Taxwise, tax adviser, Laura Burrows CTA explains the tax consequences which apply if a businesses debtors are unable to pay their debts
Q: I act for a number of corporate clients and given the effect the current lockdown is having on businesses they are looking for guidance on the tax consequences should their debtors be unable to pay their debts?
A: The loan relationship rules primarily deal with money debts that have arisen due to the lending of money, and so may not appear to be relevant when considering the treatment of unpaid trade debts. However, Chapter 2 of Part 6 of CTA 2009 extends the scope of the loan relationship provisions to also apply to ‘relevant non-lending relationships’.
Bad debts are ‘impairment losses’ within the tax legislation which are not to be confused with formal releases of debt. Impairments include ‘uncollectability’ (S476 CTA 2009) and so specific bad debts provisions would be acceptable but general provisions will not. See also s324 CTA 2009 which HMRC will generally use to support their position that general provisions are not allowable.
Section 479 CTA 2009 treats trade debts as a ‘relevant non-lending relationship’. S479(2)(c) covers bad trade debts and so where there is a bad debt arising to your corporate client, then the debt in the accounts will be a trade deduction as a trading loan relationship debit. However, the availability of tax relief will depend on whether the debt arose from a transaction with a connected company or an unconnected company.
Should the debt be between connected companies (group companies or companies controlled by the same person – s466 CTA 2009) the loan relationship rules state that any debit arising in relation to an impairment loss of a connected company transaction would not be allowable (s354 CTA 2009). Even if accounts are being prepared under FRS102, for tax purposes loan relationships between connected companies are calculated using the amortized cost basis (s349 CTA 2009).
If the trade debts are from unconnected companies then the debit will be allowable subject to the numerous anti-avoidance provisions of Part 5 Chapter 15 CTA 2009. HMRC’s guidance on these provisions is at CFM38000.
See CFM41000 for HMRC guidance on the issues mentioned above.
This update is subject to change at short notice as the government releases its own updates – this guidance was last updated Tuesday 19 May 2020
Further information on covid-19 is available here, Croner Taxwise consultants
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