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Readers' Forum
Replies to Queries — 2
Company cessation
In 2002 a trading company ceased to trade. Its fixed assets were transferred at net book value to a second company, which collected outstanding trade debtors and cleared outstanding liabilities. A net balance of £260,000 remained outstanding from the acquiring company to the former trading company.
Readers' Forum
Replies to Queries — 2
Company cessation
In 2002 a trading company ceased to trade. Its fixed assets were transferred at net book value to a second company, which collected outstanding trade debtors and cleared outstanding liabilities. A net balance of £260,000 remained outstanding from the acquiring company to the former trading company.
It is now wished to write off the outstanding debt and the directors of the former trading company appreciate that there will be no bad debt relief.
The directors of the acquiring company wish for confirmation that the release of the debt will not give rise to any taxable profit within their company.
On the face of it, it would appear that although the debt may be considered to be a trade debt, since the acquiring company will not have claimed any tax deduction other than capital allowances, it should not be treated as a taxable profit. However, given the size of the debt released, the directors would like confirmation.
Readers' views are welcomed.
(Query T16,497) — Newport.
The tax treatment of any write-off of the debt will depend, firstly, on whether the debt represents a loan relationship of the two companies. A loan relationship is defined by FA 1996, s 81(1) as follows.
'… a company has a loan relationship for the purposes of the Corporation Tax Acts wherever:
(a) the company stands (whether by reference to a security or otherwise) in the position of a creditor or debtor as respects any money debt; and
(b) that debt is one arising from a transaction for the lending of money; …'
Clearly the first condition applies in the circumstances outlined by 'Newport'.
However, the debt has not arisen from a transaction for the lending of money; it has arisen from the transfer of assets. For the purposes of the loan relationships legislation, this means it is a trade debt. Such debts are not covered by the loan relationships legislation.
The legislation governing the treatment of trade debts is found in TA 1988, s 94.
'Where, in computing for tax purposes the profits of a trade, profession or vocation, a deduction has been allowed for any debt incurred for the purposes of the trade, profession or vocation, then, if the whole or any part of the debt is released otherwise than as part of a relevant arrangement or compromise, the amount released shall be treated as a receipt of the trade, profession or vocation arising in the period in which the release is effected.'
So it would be normal for the release of a trading debt to be taxable in the hands of the debtor if written off by the creditor, unless that is part of a relevant arrangement or compromise whereby the debts are being released to enable the debtor company to be wound up. The latter cannot apply here, because it is the creditor company that you want to wind up, not the debtor. However, it is clear from the legislation that the writing off of a debt is only taxable where a deduction has previously been allowed in computing the profits for tax purposes in the accounts of the debtor company. It will not apply, therefore, when the debt has arisen in relation to capital expenditure or non-allowable expenditure. This analysis is confirmed by the Inland Revenue's Business Income Manual at para 40201.
In this particular scenario, the debt arose from the transfer of capital assets such that the company would not have had a deduction for tax purposes for the value of any of the debt. The fact that the company may have claimed capital allowances on the value of the assets transferred would not mean that a deduction has been claimed for the purposes of computing the profits for tax purposes. On this basis, the write-off of the debt will not generate a taxable receipt.
'Newport' is correct in stating that there would be no bad debt relief in the accounts of the transferor company for the write-off of the debt.
