Corporation Tax Bill

House of Commons

Session 2008 - 09
Internet Publications
Other Bills before Parliament

Corporation Tax Bill

Corporation Tax Bill
Part 5 — Loan Relationships
Chapter 6 — Connected companies relationships: impairment losses and releases of debts
162

Exclusion of debits for impaired or released connected companies debts
354
Exclusion of debits for impaired or released connected companies debts
(1)
The general rule is that no impairment loss or release debit in respect of a
company’s creditor relationship is to be brought into account for the purposes
of this Part for an accounting period if section 349 (application of amortised
5
cost basis to connected companies relationship) applies to the relationship for
the period.
(2)
That rule is subject to—
(a)
section 356 (swapping debt for equity), and
(b)
section 357 (insolvent creditors).
10
(3)
Nothing in this section affects the debits to be brought into account for the
purposes of this Part in respect of exchange gains or losses arising from a debt.
355
Cessation of connection
(1)
This section applies if, in the case of a creditor relationship of a company—
(a)
an impairment loss or release debit is excluded by section 354 from
15
being brought into account for any accounting period, and
(b)
there is a later accounting period for which the creditor relationship in
respect of the debt is not a connected companies relationship.
(2)
So far as any amount represents the impairment loss or release debit, no debit
may be brought into account in respect of it—
20
(a)
for the first accounting period within subsection (1)(b), or
(b)
for any subsequent such accounting period.
356
Exception to section 354: swapping debt for equity
(1)
An impairment loss or release debit in relation to a liability to pay any amount
to a company (“the creditor company”) under its creditor relationship is not
25
prevented from being brought into account by section 354 if conditions A, B
and C are met.
(2)
Condition A is that the creditor company treats the liability as discharged.
(3)
Condition B is that it does so in consideration of—
(a)
any shares forming part of the ordinary share capital of the company
30
on which the liability would otherwise have fallen, or
(b)
any entitlement to such shares.
(4)
Condition C is that there would be no connection between the two companies
for the accounting period in which the consideration is given if the question
whether there is such a connection were determined by reference only to times
35
before the creditor company—
(a)
acquired possession of the shares, or
(b)
acquired any entitlement to them.

Corporation Tax Bill
Part 5 — Loan Relationships
Chapter 6 — Connected companies relationships: impairment losses and releases of debts
163

357
Exception to section 354: insolvent creditors
(1)
An impairment loss or release debit is not prevented from being brought into
account by section 354 in relation to an amount accruing to a company (“the
creditor”) if—
(a)
condition A, B, C, D or E is met in relation to the creditor, and
5
(b)
the amount accrues to the creditor at a time which is the relevant time
for the condition in question.
(2)
Condition A is that the creditor is in insolvent liquidation, and for this
condition the relevant time is any time in the course of the winding up.
(3)
Condition B is that the creditor is in insolvent administration, and for this
10
condition the relevant time is any time in the course of the administration.
(4)
Condition C is that the creditor is in insolvent administrative receivership, and
for this condition the relevant time is any time when the appointment of the
administrative receiver is in force.
(5)
Condition D is that an appointment of a provisional liquidator is in force in
15
relation to the creditor under section 135 of the Insolvency Act 1986 (c. 45) or
Article 115 of the Insolvency (Northern Ireland) Order 1989 (S.I. 1989/2405
(N.I. 19)), and for this condition the relevant time is any time when the
appointment is in force.
(6)
Condition E is that under the law of a country or territory outside the United
20
Kingdom, circumstances exist corresponding to those described in condition
A, B, C or D, and for this condition the relevant time is any time corresponding
to that described in the case of the condition in question.
(7)
Section 323 applies for interpreting this section as it applies for interpreting
section 322(6).
25
Exclusion of credits for connected companies debts on release or reversal of impairments
358
Exclusion of credits on release of connected companies debts: general
(1)
This section applies if—
(a)
a liability to pay an amount under a company’s debtor relationship is
30
released,
(b)
the release takes place in an accounting period for which—
(i)
an amortised cost basis of accounting is used in respect of the
relationship, and
(ii)
the relationship is a connected companies relationship.
35
(2)
The company is only required to bring a credit into account in respect of the
release for the purposes of this Part if it is a deemed release.
(3)
In subsection (2) “deemed release” means a release which is deemed to occur
because of—
(a)
section 361 (acquisition of creditor rights by connected company at
40
undervalue), or
(b)
section 362 (parties becoming connected where creditor’s rights subject
to impairment adjustment).

Corporation Tax Bill
Part 5 — Loan Relationships
Chapter 6 — Connected companies relationships: impairment losses and releases of debts
164

359
Exclusion of credits on release of connected companies debts during
creditor’s insolvency
(1)
This section applies if—
(a)
a liability to pay an amount under a company’s debtor relationship is
released,
5
(b)
the release takes place in an accounting period for which an amortised
cost basis of accounting is used in respect of that relationship,
(c)
condition A, B, C, D or E in section 357 is met in relation to the company
releasing the amount,
(d)
immediately before the time when the condition in question was first
10
met the relationship was a connected companies relationship, and
(e)
immediately after that time it was not such a relationship.
(2)
The company is not req uired to bring into account a credit in respect of the
release for the purposes of this Part.
360
Exclusion of credits on reversal of impairments of connected companies debts
15
(1)
If an impairment loss is prevented from being brought into account by section
354, no credit in respect of any reversal of the impairment may be brought into
account for the purposes of this Part.
(2)
Nothing in this section affects the credits to be brought into account for the
purposes of this Part in respect of exchange gains or losses arising from a debt.
20
Deemed debt releases on impaired debts becoming held by connected company
361
Acquisition of creditor rights by connected company at undervalue
(1)
This section applies if—
(a)
a company (“D”) is a party to a loan relationship as debtor,
(b)
another company (“C”) becomes a party to it as creditor,
25
(c)
immediately after it does so C and D are connected,
(d)
in a case where the person from whom C acquires its rights under the
loan relationship is a company, in the period of account in which C
acquires them there is no connection between C and that company,
(e)
the amount or value of any consideration given by C for the acquisition
30
is less than the pre-acquisition carrying value (see subsection (5)), and
(f)
at least one of the conditions in subsection (2) is met.
(2)
The conditions are that—
(a)
the acquisition is not an arm’s length transaction, and
(b)
there was a connection between C and D at any time in the period of 3
35
years beginning 4 years before the date of the acquisition.
(3)
C is treated as releasing its rights under the loan relationship when it acquires
them.
(4)
The amount treated as released is the amount of the difference referred to in
subsection (1)(e).
40
(5)
In subsection (1)(e) “the pre-acquisition carrying value” means the amount
which would be the carrying value of the liability under the loan relationship

Corporation Tax Bill
Part 5 — Loan Relationships
Chapter 6 — Connected companies relationships: impairment losses and releases of debts
165

in D’s accounts if a period of account had ended immediately before C became
a party to it.
(6)
For the purposes of subsection (5) the carrying value is determined taking no
account of—
(a)
accrued amounts, or
5
(b)
amounts paid or received in advance.
362
Parties becoming connected where creditor’s rights subject to impairment
adjustment
(1)
This section applies if—
(a)
a company (“D”) is a party to a loan relationship as debtor,
10
(b)
another company (“C”) which—
(i)
is a party to the loan relationship as creditor, and
(ii)
is not connected with D,

becomes connected with D, and
(c)
the pre-connection carrying value would have been adjusted for
15
impairment if a period of account had ended immediately before the
companies became connected.
(2)
C is treated as releasing its rights under the loan relationship when C and D
become connected.
(3)
The amount treated as released is the amount of the impairment adjustment
20
referred to in subsection (1)(c).
(4)
In subsection (1)(c) “the pre-connection carrying value” means the amount that
would be the carrying value of the asset representing the loan relationship in
C’s accounts if a period of account had ended immediately before the
companies became connected.
25
(5)
For the purposes of subsection (4) the carrying value is determined taking no
account of—
(a)
accrued amounts,
(b)
amounts paid or received in advance, or
(c)
impairment losses.
30
363
Companies connected for sections 361 and 362
(1)
For the purposes of sections 361 and 362 there is a connection between two
companies at any time if condition A or B is met at that time.
(2)
Condition A is that one company has control of the other.
(3)
Condition B is that both companies are under the control of the same person
35
(but see subsection (6)).
(4)
For the purposes of sections 361 and 362 there is a connection between two
companies in a period of account if there is a connection between them (within
subsection (1)) at any time in the period.
(5)
Section 472 (meaning of “control”) applies for the purposes of this section.
40
(6)
Condition B is not taken to be met just because two companies have been under
the control of—

Corporation Tax Bill
Part 5 — Loan Relationships
Chapter 7 — Group relief claims involving impaired or released consortium debts
166

(a)
the Crown,
(b)
a Minister of the Crown,
(c)
a government department,
(d)
a Northern Ireland department,
(e)
a foreign sovereign power, or
5
(f)
an international organisation.
(7)
Section 468 (connection between companies to be ignored in some
circumstances) applies for the purposes of this section as it applies for the
purposes of the provisions which apply section 466, taking references in
sections 468 and 469 to the accounting period as references to the period of
10
account.
(8)
For the meaning of “international organisation”, see section 476(2) and (3).
Chapter 7
Group relief claims involving impaired or released consortium debts
364
Introduction to Chapter
15
(1)
This Chapter applies if—
(a)
there is (or was) a relevant consortium creditor relationship (see
subsection (2)), and
(b)
either—
(i)
an impairment loss is or has been brought into account for the
20
purposes of this Part for any group accounting period by the
creditor, or
(ii)
a debit in respect of a release of liability under the relationship
is or has been so brought into account.
(2)
For the purposes of this Chapter a relationship is a relevant consortium
25
creditor relationship if—
(a)
it is a creditor relationship of—
(i)
a company (the “member company”), which is a member of a
consortium by which a consortium company is owned, or
(ii)
a company (a “group member”) which is a member of the same
30
group of companies as the member company but is not itself a
member of the consortium, and
(b)
the consortium company or, if that company is a holding company, a
consortium company which is a subsidiary of that company is (or was)
the debtor (the “debtor consortium company”).
35
(3)
The provisions of this Chapter—
(a)
reduce debits for impairment losses and release debits under relevant
consortium creditor relationships where an amount surrendered as
group relief by the consortium company is claimed by a member
company or group member (see section 365),
40
(b)
provide for a corresponding reduction in credits in respect of such
relationships where a reduction within paragraph (a) has occurred (see
section 367),

Corporation Tax Bill
Part 5 — Loan Relationships
Chapter 7 — Group relief claims involving impaired or released consortium debts
167

(c)
reduce claims for group relief where debits within paragraph (a) for
earlier group accounting periods exceed reductions within paragraph
(b) (see section 368), and
(d)
provide for such claims to be carried forward where they exceed such
debits (see section 369).
5
(4)
In this Chapter “release debit” means a debit in respect of a release of liability
under a relevant consortium creditor relationship.
(5)
If section 403C of ICTA (amount of relief in consortium cases) applies, effect
must be given to that section before effect is given to this Chapter.
(6)
Expressions defined in this section have the same meaning in the other
10
provisions of this Chapter, and sections 370 and 371 also apply for the
interpretation of this Chapter.
(7)
For the meaning of “impairment loss” see section 476(1).
365
Reduction of impairment loss debits where group relief claimed
(1)
This section applies for any group accounting period for which there is a net
15
consortium debit.
(2)
For the purposes of this Chapter there is a net consortium debit for a group
accounting period if—
(a)
the total of the impairment losses and release debits brought into
account for that period in respect of relevant consortium creditor
20
relationships by—
(i)
the member company, and
(ii)
every group member,

exceeds
(b)
the total credits so brought into account by them in connection with
25
debts owed by the companies which are the debtor consortium
companies in respect of those relationships.
(3)
The net consortium debit is equal to that excess.
(4)
If there is a claim for that group accounting period by the member company or
a group member for group relief in respect of an amount which may be
30
surrendered as group relief by the debtor consortium companies, the debits
brought into account in respect of the impairment losses and the release debits
mentioned in subsection (2)(a) are reduced.
(5)
The amount of reduction in the case of each of the debits referred to in
subsection (4) (“the relevant debits”) is calculated as follows.
35
Step 1

Find the total amount which—
(a)
may be surrendered as group relief by the debtor consortium
companies, and
(b)
is claimed as group relief for the group accounting period by the
40
member company or any group member.

Corporation Tax Bill
Part 5 — Loan Relationships
Chapter 7 — Group relief claims involving impaired or released consortium debts
168

Step 2

If the amount found at Step 1 does not exceed the net consortium debit,
apportion the amount found at Step 1 between the relevant debits in
proportion to their respective amounts.

If the amount found at Step 1 exceeds the net consortium debit, apportion so
5
much of the amount found at Step 1 as does not exceed it between the relevant
debits in proportion to their respective amounts.
(6)
This section is subject to section 366.
366
Effect where credit for release brought into account on amortised cost basis
(1)
This section applies if—
10
(a)
a company releases liability under a relevant consortium creditor
relationship of the company (“the release amount”), and
(b)
the debtor consortium company brings into account an amount in
respect of the release for any accounting period in accordance with an
amortised cost basis of accounting.
15
(2)
An amount equal to the release amount is treated for the purposes of this
Chapter as not being a debit brought into account for that period in relation to
the relevant consortium creditor relationship.
367
Reduction of credits exceeding impairment losses
(1)
This section applies if, apart from this section, for any group accounting
20
period—
(a)
the total of the impairment losses and release debits brought into
account for that period in respect of relevant consortium creditor
relationships by—
(i)
the member company, and
25
(ii)
every group member,

is less than
(b)
the total credits so brought into account by them in connection with
debts owed by the companies which are the debtor consortium
companies in respect of those relationships.
30
(2)
Those credits are reduced (but not below nil) in accordance with subsection (3).
(3)
The amount of reduction in the case of each credit is calculated as follows.
Step 1

Find the total amount by which the debits in respect of the relationships for
previous group accounting periods have been reduced under section 365(4).
35
Step 2

Deduct the total amount by which credits have previously been reduced under
this section from the amount found at Step 1.
Step 3

Apportion the amount found at Step 2 between the credits in proportion to
40
their respective amounts.