Rely on the most comprehensive, up-to-date legal content designed and curated by lawyers for lawyers
Work faster and smarter to improve your drafting productivity without increasing risk
Accelerate the creation and use of high quality and trusted legal documents and forms
Streamline how you manage your legal business with proven tools and processes
Manage risk and compliance in your organisation to reduce your risk profile
Stay up to date and informed with insights from our trusted experts, news and information sources
Access the best content in the industry, effortlessly — confident that your news is trustworthy and up to date.
Find up-to-date guidance on points of law and then easily pull up sources to support your advice with Lexis PSL
Check out our straightforward definitions of common legal terms.
Our trusted tax intelligence solutions, highly-regarded exam training and education materials help guide and tutor Tax professionals
Access our unrivalled global news content, business information and analytics solutions
Insurance, risk and compliance intelligence using big data, proprietary linking and advanced analytics.
A leading provider of software platforms for professional services firms
In-depth analysis, commentary and practical information to help you protect your business
LexisNexis Blogs shed light on topics affecting the legal profession and the issues you're facing
Legal professionals trust us to help navigate change. Find out how we help ensure they exceed expectations
Lex Chat is a LexisNexis current affairs podcast sharing insights on topics for the legal profession
Discuss the latest legal developments, ask questions, and share best practice with other LexisPSL subscribers
When a company is in financial distress, it needs to act quickly and one factor in determining which restructuring route to pursue may be the relevant tax treatment of the deal. By extending the cases where tax relief is available, the government hopes to promote a greater range of options. Lara Okukenu, senior tax manager at Deloitte, explains the changes put forward.
When an unconnected debt is released—ie the creditor waives the debtor’s obligation to repay—amounts credited in the debtor’s accounts in respect of the release will normally be taxable as loan relationship credits.
This requirement to tax the release credit does not apply where:
Despite this, however, until the draft Finance Bill 2015, no such relief was afforded for companies in financial distress for whom a debt/equity swap or formal insolvency processes were not appropriate. The government has sought to address this by introducing new provisions removing the need to bring into account loan relationship credits arising on a release of debt, where it is reasonable to assume that—but for the release—there would be a material risk that within the 12 months following the company would be unable to pay its debts.
The terms ‘reasonable to assume’ and ‘material risk’ should, when taken together, mean there must be a realistic likelihood of the company going into insolvency within 12 months of the date of the release if remedial action is not taken.
This is intended to hypothesise a position that would have happened but for the debt release. It is not intended to imply that the company’s directors are currently in breach of their company law obligations by continuing to trade.
There is no prescriptive list of evidence that must be provided to benefit from the tax relief, however draft HMRC guidance does provide a list of the sort of circumstances one may look to, including:
Given the subjective nature of this exemption, one would advise contemporaneous evidence is maintained. In many cases, the facts will be quite clear in practice.
It is intended that the changes should be effective for any releases of a debtor relationship of a company on or after 1 January 2015.
However, as noted above, in applying the exemption it must be reasonable to assume that but for the release, there would be a material risk that within the 12 months following the release, the company would be unable to pay its debts.
The new general exemption is intended to facilitate corporate rescue without requiring a formal process or the uncertainties and restrictions associated with debt/equity swaps. Hopefully, this will reduce the need for advance HMRC clearance which is currently viewed by companies (and their lenders) as a critical component of corporate restructurings.
The acid test will be whether it is feasible for companies and their advisors to conclude that as at the time of the release, the conditions are satisfied. In many cases, the facts will be clear. However, in boundary cases companies will need to assess whether clearance could be sought or, indeed, if they may need to revert to more familiar methods such as debt/equity swaps.
The proposed law changes are also intended to cover ‘modifications’ or ‘replacements’ of debts, sometimes referred to as ‘amend and extend’ exercises.
The terms ‘modifications’ or ‘replacements’ refer to the accountancy treatment whereby the debtor company realises a profit as a result of contractual terms having been changed.
In such a case, where it is reasonable to assume that but for the modification or replacement, there would be a material risk that within the 12 months following, the company would be unable to pay its debts, then again, no credit should be brought into account for tax purposes.
Equally however, any debit recognised on the reversal of an exempt credit will also be prevented from being brought into account. This prohibition does not apply to a release of debt on the basis that the debt no longer exists.
Interviewed by Julian Sayarer.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
Not a LexisPSL subscriber? Find out more about how LexisPSL can help you and click here for a free trial of LexisPSL Restructuring and Insolvency.
First published on LexisPSL Restructuring and Insolvency
Free trials are only available to individuals based in the UK
* denotes a required field
0330 161 1234