My VIP Tax Team question of the week: Loan impairment
Company A owns a 100% shareholding in Company B. Company A made a loan of £100K to Company B, but Company A has gone into insolvent liquidation. Can you explain how the loan is treated for corporation tax and the implications if the loan is written off? 

Relief should be due to Company A for the part of the loan that is irrecoverable without there being a charge on Company B. However, if Company A is in liquidation, it is unlikely that the liquidator will waive the loan to Company B but part of it may be irrecoverable depending on the financial position of company B.

A non-trading loan relationship exists if a company stands in the position of creditor or debtor with respect to any money debt and the transaction is for the lending of money, CTA09 S302(1). It appears that Company A has loaned money to Company B therefore this should be treated as non-trading loan relationship for corporation tax purposes.

A “creditor relationship”, in relation to a company, means any loan relationship of the company where it stands in the position of a creditor as respects the debt in question. Company A stands in the position of creditor. CTA09 S302(5)

A “debtor relationship”, in relation to a company, means any loan relationship of the company where it stands in the position of a debtor as respects the debt in question. Company B stands in the position of the debtor. CTA09 S302(6)

The meaning of money debt is given under CTA09 S303.

Unconnected Companies

A loan relationship write off would usually require credits and debits to be brought into account following the generally accepted accounting practice, CTA09 S306A to S313. However, this can be overridden by further specific rules within the loan relationship legislation.

Connected Companies

A connected company is defined under CTA09 S466(2) and summarised as follows:

• A controls B
• B controls A
• A and B are controlled by the same person

The meaning of control is provided at CTA09 S472.

Company A has 100% shareholding control of B so will be connected for the purposes of the loan relationship regime.

If there is a write off between connected companies no debit would be allowed for Company A and no credit for Company B. CTA09 S354 and S358

However, there’s an exception to this rule when creditor is under insolvent liquidation at the relevant time, therefore a debit would be allowed to Company A if it were impaired during the relevant time of that period. CTA09 S357. See CFM35410.

Company B is also not required to bring in a credit if conditions under CTA09 S359 are met which are broadly that s357 applies to the creditor company. See CFM35420.

The above is based on there is no unallowable purpose or tax avoidance under CTA09 S441 and S455.

For further information, please see the Croner-i Direct Tax Reporter at 717-529.

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David Lawson

David started his career in HMRC.  During his time, he conducted tax investigations into OMB’s and certain avoidance structures.  He has gained experience of working in practice for a couple of years before joining Croner Taxwise December 2020.  He is a member of the ATT.

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