Annex 1: Minor Changes in the Law Change 56: Loan relationships: references to connections between a company and another person to be rewritten as applying to connections between two companies: sections 348, 361, 468, 469 and 470. Paragraph 4A of Schedule 9 to FA 1996
Paragraph 4A of Schedule 9 to FA 1996 provides for the deemed release of a loan (and hence a charge on the debtor company) where the creditor company acquires the loan from a second person for an amount less than the carrying value in the accounts of the debtor company. Under sub-paragraph (2)(d) this provision does not apply where there is a connection between the new creditor company and the person from whom it acquired that debt. Sub-paragraph (8) provides the meaning for the purposes of the paragraph of connection between a company and another person. In both instances the other person is a company.
It seems probable therefore that “person” in paragraph 4A(2)(d) refers to a company only. Indeed, the effect of paragraph 4A is that no charge arises from a released debt where a loan is passed between group companies.
The far less likely interpretation is that paragraph 4A(8) of Schedule 9 to FA 1996 only provides the definition where the other person is a company and that it is up to the courts to interpret what is meant by connection in paragraph 4A(2)(d) where the person is an individual. Paragraph 4A(2)(d) is therefore rewritten as being only of relevance where the person is a company.
If the courts decided that “connected persons” in sections 87 and 88 of FA 1996 included individuals the rewrite of those sections would extend the circumstances where the amortised cost basis was compulsory. This could be favourable or unfavourable to the taxpayer depending on the effects of applying that particular basis of accounting. If it were held that “person” in paragraph 4A of Schedule 9 to FA 1996 included an individual this would reduce the circumstances when there was a deemed release by the creditor company of its rights under the loan relationship which one would expect to be taxpayer favourable.
This change is in principle adverse to some taxpayers and favourable to others. But it is expected to have no practical effect as it is in line with current practice.