Introduction Details of the Section
2.Subsections (2) and (3) move the definition of a “release debit” from Chapter 6 of Part 5 of CTA (which deals with releases of debts between connected companies) to section 476 of CTA, which contains definitions that apply for the purposes of the loan relationships rules generally. This is necessary because the term is being applied more widely – it now also applies to debts that are taxed in the same way as loans.
3.Where a creditor company agrees to release a debtor from its liability to repay a loan or debt, the accounts of the creditor company will show a loss (if the company has not already written off the debt as bad). This loss is referred to as a “release debit”.
4.Subsection (4) introduces the main elements of the section. The new provision amends the rules on “relevant non-lending relationships” in Chapter 2 of Part 6 of CTA. A “relevant non-lending relationship” is a money debt that does not arise from the lending of money – trade debts are the most common example. Chapter 2 of Part 6 provides for the loan relationships rules (found in Part 5 of CTA) to apply to such debts in defined circumstances and to a defined extent: section 479 of CTA sets out the circumstances, and section 481 the extent.
5.Subsections (5) and (6) do two things. First, subsection (5) amends section 479(2)(c), which deals with the position of the creditor company. Section 479(2)(c) applies the loan relationships rules to an “impairment loss” on a money debt – where the creditor writes down a bad or doubtful debt. This means that the creditor does not get tax relief if it is connected with the debtor company. (Two companies are connected if one controls the other, or they are under common control.) The amendment puts it beyond doubt that section 479(2)(c) applies where a debt is released, as well as to an impairment loss.
6.Subsection (5) then adds a new circumstance in which the loan relationships rules will be applied to money debts. This is where a company is released from a debt in respect of which a “relevant deduction” has been allowed for tax purposes – in other words, it covers the position of the debtor company.
7.Subsections (8) to (11) amend section 481 of CTA, which sets out how the loan relationships rules apply to “relevant non-lending relationships”. In general, all the computational rules (including those relevant to connected companies) will apply, but only in relation to matters specified in section 481(3).
8.Subsection (9) therefore makes amendments to section 481(3) corresponding to those already made to section 479. It makes it clear that, for the creditor, the loan relationships rules apply to a “release debit” as well as to an impairment loss; and it adds a new paragraph which applies those rules to the company that has been released from the debt, provided it has previously had a “relevant deduction”.
9.Subsection (11) applies the definition of “relevant deduction” to section 481.
10.Subsection (12) is the commencement provision: the amendments will apply to all debt releases that take place on or after 22 April 2009.