Loan relationship changes

Home > News > Latest news > Tax > Loan relationship changes

Recently visited pages

HMRC have now published draft legislation regarding changes to the loan relationships rules between connected companies for late paid interest and releases of trade debts. The proposed changes are more favourable in both cases than anticipated and will apply for accounting periods beginning on or after 1 April 2009.

Late paid interest

The late payment rules for connected companies, whereby interest is only tax deductible on a ‘paid’ basis if unpaid 12 months after the end of an accounting period, will now be disapplied except in either of the following two situations:

The creditor is not resident in a ‘qualifying territory’ (ie one that is not on a ‘white’ list)
When the debtor is involved in a tax avoidance scheme and the creditor will be untaxed on the corresponding income.

Where either condition applies the debtor company will continue to get relief on a ‘paid’ basis although this is only expected to apply in a small number of situations.

Companies will, however, be able to elect for the current basis to continue to apply to the first accounting period beginning on or after 1 April 2009, should it be beneficial for them to do so.

Debits disallowed under the current rules will remain deductible only when paid, but those subsequently treated as allowable under the provisions of Revenue & Customs Brief 33/08 will not need to be adjusted again. However, when this new legislation is in force it will not be possible to avoid the late interest rule on non-qualifying territories.

As a result, if a UK company is charged interest on a loan from a connected company that is not a ‘qualifying territory’, there is now a limited opportunity to file on an accruals basis for those territories for open returns for accounting periods ending before 1 April 2009.

Release of trade debts

The legislation will remove the situation where, on the release of a trade or property business debt between connected companies, the creditor receives no tax relief but the debtor is taxed under s94 ICTA 1988, except where the release is part of a statutory insolvency arrangement. It will do this by bringing the debtor within the loan relationships rules so the debtor will now be untaxed on release of the debt.

As a result, any releases of trading or property business debts between connected companies should be avoided until the much more favourable new rules are in force.