Ken Moody highlights a tricky aspect of the loan relationship rules for companies.
Company loan relationships is a complex subject, especially between connected companies. While accounting adjustments in respect of impairment of intercompany debt are broadly neutral overall for corporation tax purposes, as always the devil is in the detail.
A company has a ‘loan relationship’ (LR) if:
(a) it stands in the position of debtor or creditor in respect of a ‘money debt’, and
(b) the debt arises from a transaction for the lending of money.
Connected companies
Where the creditor and debtor companies are connected, they are required to use an ‘amortised cost’ basis in respect of a LR and special rules apply to debits or credits for any impairment adjustment or release of the debt.
Broadly, the legislation (CTA 2009, s 364) denies the creditor company any relief for any impairment or write-off, while s 358 relieves the debtor company from tax on any write-back.
Two companies are ‘connected’ if one controls the other or both are controlled by the same ‘person’ (CTA 2009, s 363). The test is, therefore, quite straightforward. There is no attribution of rights of associates (as required by CTA 2010, s 451 in relation to the control test for close companies). The only further ‘twist’ is that under IA 1978, ‘person’ includes a body of persons, and it was decided in Floor v Davis [1979] STC 379 that ‘person’ (in relation to the capital gains tax ‘value shifting’ rules in TCGA 1992, s 29) should be read as including the plural.
Inter-company debts
Inter-company debt between the group and other companies in the same ownership is, of course, common, but are inter-company debts LRs? This is a moot point because while such debts will be money debts, they may or may not arise from a transaction for the lending of money. The debt may relate to assets transferred or goods or services supplied, or to a variety of things.
A normal trade debt (for example) again is a money debt, but which does not arise from a transaction for the lending of money. It is not, therefore, by definition, a LR. Enter CTA 2009, Pt 6 (‘Relationships treated as loan relationships’), of which Chapter 2 relates to ‘relevant non-lending relationships’ (RNRs).
If a company has a RNR, the normal LR rules (in CTA 2009, Pt 5) apply in relation to ‘relevant matters’, which includes impairment of a trade debt and any credit for the reversal of same. There are a few other ‘relevant matters’ but unless an inter-company debt between connected parties is a transaction for the lending of money in the circumstances, it may not be a LR and the rules on connected party debt may not apply.
All is not lost though, because under CTA 2009, s 303(3):
‘A money debt is a debt arising from a transaction for the lending of money … If an instrument is issued … for the purpose of representing:
(a) A security for the debt, or
(b) The rights of a creditor in respect of the debt.’
It is therefore possible to bring an inter-company debt which is not a LR per se within the LR rules by the issue by the debtor company of a loan note as security for the debt. If it is then decided to write off the debt in both companies this should be within s 354/s 358 and, therefore, neutral. But the important point to take away is that, contrary to what some may assume, the tax-neutrality of connected company debt is not automatic. It has to be within the LR rules.
