Budget 2009 – release of trade debts

Finance Bill 2009, cl. 42, brings trade debts within the loan relationship rules. A trade debt is one incurred for the supply of goods or services etc., for use in the debtor’s trade or property business.

Where the debtor company had claimed a corporation tax deduction for the debt, and that debt was subsequently released, the debtor company would have a corresponding add back to its chargeable profits for the accounting period of release. The exception was where the debt was released as part of a statutory insolvency arrangement (as defined in ICTA 1988, s.834(1)).

Within groups of companies, this would lead to the not uncommon situation of a parent wanting to release a subsidiary from some, or all, of a trade debt but needing the subsidiary to enter into a court sanctioned compromise or arrangement if the subsidiary was not to incur a tax charge.  There have also been many instances, particularly with group or associated companies having longstanding inter company balances, where it has not been possible to unpick the composition of a current balance to determine whether it includes any trade debt.

From 22 April 2009, trade debts are now brought within the loan relationship rules for debtor companies. Where such debts are written down, or off, the treatment will now be neutral. The creditor company will continue (as has been the case since 2005) to be denied a corporation tax deduction for the debt written off, or the release debit as it will now be known, and the debtor company will have no corresponding corporation tax receipt.