Debt Write Offs - further change and draft legislation

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10 November 2009

On Tuesday, HMRC published draft legislation implementing the rule changes to the way in which groups of companies are taxed when they buy back debt at a discount. They have also made a further change to the proposals. The draft legislation contains the transitional provisions.

To start with the further change; HMRC have been worried about comments made in the tax press that the "secondary charge" ie. the charge which would arise on the intergroup write off of bought in debt, (where there is no charge on the buy in) can be avoided by a debt equity swap. So, they are changing the legislation so that if there is a buy-in of the debt which meets the relevant criteria, which is then collapsed by way of debt equity swap, that debt equity swap will not be fiscally neutral. Instead, if the debt is released in consideration for ordinary shares in the debtor, then the debtor will still be taxed on the previously untaxed discount arising on the debt buy back.

The legislation itself makes changes to section 361 CTA 2009, adds new sections 361A - 361C and also amends section 322 which deals with cases where, on the release of debt, the debtor doesn't need to bring a chargeable credit into account.

However it is important to emphasis that where arms length debt between a third party lender and a borrower is released, the consideration being the issue of shares in the borrower, nothing has changed. In these circumstances the lender can take a tax write down, and there is no corresponding taxable credit in the borrower.

The draft legislation does not use terms suggested in the original press release such as, "intrinsic" and "severe financial problems". Instead the general rule in section 361 (which provides that there is a deemed release and thus taxable credit, for the borrower on the acquisition of the loan relationship by the company connected with the borrower), will apply, unless one of three exceptions applies. These are the new 361A - C.

The first is called the "corporate rescue exception", the second is the "debt-for-debt exception" and the third is the "equity-for-debt exception". The first of these is the legislative reflection of the original "intrinsic" and "severe financial problems" concepts, but these are no way used in the exception. They are reasonably self explanatory but need careful review.

The new provisions will not affect acquisition of loan relationships which are made either pursuant to an agreement entered into before 14 October 2009 or between 14 October 2009 and 31 January 2010, provided certain conditions are met (there are three of these, they are detailed, and require scrutiny).

To find out how these changes affect you please contact Nigel Popplewell by email ( or alternatively by telephone 0117 902 2782.

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