Tax Journal

Waiver of inter-company debt between group companies

26 October 2017
Peter Rayney (Peter Rayney Tax Consulting) provides practical advice to company that wishes to waive part of a debt owed by one of its subsidiaries.
 

Question

Barnsley Holdings Ltd (‘Holdings’) wishes to ‘waive’ £300,000 of the £439,900 due from one of its 100% subsidiaries, Rusby Trading Ltd (RTL), as shown in its draft accounts for the year ended 30 September 2017. The inter-company debt of £439,885 relates to the following outstanding items (allocating ‘payments’ against the oldest items first):

 

£

Funding for RTL additional working capital

200,000

Management charges for RTL (2016)

125,600

Management charges for RTL (2017)

114,300

Total

439,900

What are the tax effects of the loan waiver for Holdings and RTL?

Answer

Scope of the loan relationship regime

It is first necessary to determine the extent to which the inter-company loan account falls within the loan relationship regime. It would appear that the inter-company account balance represents a simple debt and is not evidenced by any form of debenture or debt instrument.

Under CTA 2009 s 302, a company is treated as having a loan relationship if ‘it stands in the position of a creditor or debtor as respects any money debt ... and the debt arises from ... the lending of money’. Therefore, the funding element of the loan (£200,000) would be a loan relationship.

The outstanding management charges (£239,900) represent a trading debt, as opposed to the lending of money. However, the ‘relevant “non-lending” relationship rules’ in ...

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