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.
