Annex 1: Minor Changes in the Law Change 8: Trading income: align rules for debts proving irrecoverable after trade deemed to have ceased with general rules for bad debts: section 55 and Schedule 1
This change aligns the relief given for bad debts by section 89 of ICTA with the relief given by section 88D of ICTA.
Section 337(1) of ICTA sets out what happens if a company begins or ceases to carry on a trade or begins or ceases to be within the charge to corporation tax. Its trade profits are calculated as if the trade begins or ceases to be carried on.
Section 89 of ICTA provides relief for bad debts if there is an “event” within section 337(1) of ICTA or if there is a change in the persons carrying on the trade. It gives relief for bad debts which meet certain conditions. Since the trade carried on before the event or change is deemed to be different from the trade carried on after the event or change section 74(1)(e) of ICTA would otherwise prohibit a deduction for bad debts. The desired effect is to treat the trade as continuing as far as bad debts are concerned.
Although the aim of section 89 of ICTA is the same as that of section 88D of ICTA (that is, to give relief for bad trade debts), there are significant differences between the two sections and the nature of the relief given. Specifically:
	section 89 gives relief for debts which are irrecoverable, whereas section 88D gives relief for an impairment loss;
	section 89 requires proof that a debt is irrecoverable, whereas section 88D has no corresponding requirement; and
	section 88D refers to debts released as part of a “statutory insolvency arrangement”, whereas section 89 makes no mention of this.
The approach adopted in this Act is to focus on the company carrying on the trade rather than on the trade. So it does not matter whether the debt was created when another taxpayer was carrying on the trade and this Act repeals section 89 of ICTA without rewriting it (see Schedule 1). The change extends the more generous provisions of section 88D of ICTA to debts within section 89 of ICTA. This simplifies the law by bringing the bad debt relief provisions for companies into one section.
This change is in taxpayers’ favour in principle and may in practice benefit some. But the numbers affected and the amounts involved are likely to be small.