Distressed companies and the corporate rescue exemption—the Finance (No 2) Act 2015

Distressed companies and the corporate rescue exemption—the Finance (No 2) Act 2015

How have the changes introduced by the Finance (No 2) Act 2015 (F(No 2)A 2015) affected the corporate rescue exemption? Graham Robinson, tax partner at PwC, considers the development of the corporate rescue exemption in light of these changes.

Broadly, what is the background to the new exemption? Why is it needed?

The loan relationship rules have various provisions to deal with situations where a company is relieved of a debt obligation for a price below its book value. For example, if a company owes £100 but is able to agree with the creditor to settle the liability for £90—the difference of £10 being a ‘discount’ which is effectively a profit for the borrower. However, the way in which these transactions are dealt with is governed by two policy objectives:

  • that companies who make an economic profit by repaying or repurchasing debt at a discount should be taxed on that profit
  • that companies in financial difficulty should be able to carry out transactions which relieve their debts without incurring onerous tax liabilities

However, these debt relief transactions are generally also, in some form, transactions where a debt is settled for less than its full book value. Therefore, an exemption is needed from the general principle that profits on repaying debt at less than full value are taxable. Without such an exemption, a financially distressed company could be forced into insolvency because a transaction to relieve its debts is not viable, because it would result in an unaffordable tax liability.

The structure of the legislation within the loan relationship rules is to tax any accounting credit arising from a loan obligation (eg the discount described above). However, in order to relieve financially distressed companies, the legislation includes a number of exemptions where the rules are not applied.

The main exemptions applicable to companies in distress were contained in section 322 of the Corporation Tax Act

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About the author:

Stephen qualified as a solicitor in 2005 and joined the Restructuring and Insolvency team at Lexis®PSL in September 2014 from Shoosmiths LLP, where he was a senior associate in the restructuring and insolvency team.

Primarily focused on contentious and advisory corporate and personal insolvency work, Stephen’s experience includes acting for office-holders on a wide range of issues, including appointments, investigations and the recovery and realisation of assets (including antecedent transaction claims), and for creditors in respect of the impact on them of the insolvency of debtors and counterparties.