Loan relationships - connected companies
The measure
HMRC have confirmed two measures that were outlined in the Pre-Budget Report.
Firstly, the release of trade debts will be taxed in the same manner as loans. This should provide for no taxation on release of intra-group trade debts, while in most cases taxing/relieving such releases in non-connected situations.
Secondly, following issues with compatibility with EU law, the rules regarding the timing of corporation tax relief for connected party interest have been reformed. Such relief will now default to an accruals basis unless the lender is resident in a 'non-qualifying territory' (broadly, a tax haven), in which case interest relief will be on a paid basis where it remains unpaid 12 months after the end of an accounting period. The same principle applies to certain discounted securities such that the discount is only relievable on redemption where the lender is resident in such a territory.
Who will be affected?
Companies that are subject to the loan relationships rules.
When?
The new rules will apply to releases of trade debts that take place on or after 22 April 2009.
The second change will have effect for company accounting periods beginning on or after 1 April 2009. A company will be able to elect for the paid basis to continue for the first accounting period which begins on or after 1 April 2009, although there is likely to be an end accounting date for this election of 30 March 2011.
This is confirmation of proposals already discussed at length and detailed in revised draft legislation released on 19 March 2009. HMRC have at this stage dropped the proposal to also introduce an anti-avoidance provision into these rules, and this is welcomed. HMRC have noted they reserve the right to introduce such a clause in a future Finance Bill if they perceive that the new rules are being abused.
Companies will need to assess their specific facts to establish whether the new rules change their existing UK tax profile and in such circumstances whether an election to continue the 'paid' basis may be attractive.
The measure should be particularly beneficial in the private equity context where companies will now be able to defer interest payments to conserve cash while still being able in most circumstances to obtain a tax deduction for the interest. On the other hand, the flexibility to control timing of interest deductions was a useful aspect of the old rules in certain circumstances.
