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Connected party loan relationships

Two changes are being introduced in respect of connected party loan relationships, both of which are expected to apply to companies with accounting periods beginning on or after 1 April 2009.

Debts owed to connected party creditors
Although the timeframe for introduction of this change has been confirmed, no details as to how the change will take effect have been released.

The change relates to the tax deductions available for interest on a loan relationship, where the creditor party does not bring the credits into account for loan relationship purposes (commonly because they are not tax resident in the UK). Under the current rules deductions are granted on a paid basis rather than an accruals basis, where the interest is not paid within twelve months of the end of the accounting period in which it is accrued.

This issue is currently subject to an HMRC consultation process and HMRC have stated that they are considering the responses received as part of the consultation process.

Asymmetry of treatment for the release of certain connected party trade debts

This change will address the asymmetric tax treatment on the release of a connected party debt, where that debt is treated for tax purposes as a trade debt. Under current rules the creditor does not receive relief for such a release, but the debtor may be taxed on the credit. Under the new rules the debtor will not be taxed on the credit. It is not yet clear how the legislation will be altered to achieve this result.

Our view
We are looking forward to receiving clarity on how the law will be amended in relation to these rules.

In relation to the correction of asymmetric tax treatment of connected party trade debts, companies have frequently been forced in the past to undertake specific planning to ensure that they do not suffer adverse tax consequences from a commercial intragroup situation and this is therefore a welcome change.