Unpicking the Finance Bill 2015—the new ‘corporate rescue’ tax relief

Unpicking the Finance Bill 2015—the new ‘corporate rescue’ tax relief

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.

What changes does the Finance Bill 2015 make for companies in financial distress?

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:

  • the release is part of a statutory insolvency arrangement
  • the debtor meets certain ‘insolvency conditions’, or
  • the release is in consideration of ordinary shares issued by the debtor to the creditor (a debt/equity swap)

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.

What does ‘financial distress’ mean and what evidence must be provided to benefit from the tax relief?

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

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About the author:
Kathy specialises in restructuring and cross-border insolvency. She qualified as a solicitor in 1995 and has since worked for Weil Gotshal & Manges and Freshfields. Kathy has worked on some of the largest restructuring cases in the last decade, including Worldcom, Parmalat, Enron and Eurotunnel.