The new “corporate rescue” tax reliefPrint publication
Subject to certain exceptions, where a corporate lender agrees to release a debt, the lender will be entitled to a tax deduction, which can be used to reduce taxable profits. On the other hand, the release will trigger a tax charge for the borrower. Given the debtor may well already be in financial distress, this is likely to be particularly unwelcome. There are therefore exceptions to this requirement to tax the release credit:
- the release is part of a statutory insolvency arrangement
- the debtor meets certain “insolvency conditions”
- the release is in consideration of the issue of shares in the borrower (or an entitlement to shares – an option or warrant) – a “debt for equity swap”.
In December 2014, the Government published draft legislation removing the need to bring into account loan relationships arising on the release of a debt where it is reasonable to assume that – but for the release – there would be a material risk that within the 12 months following, the company would be unable to pay its debts. A company will be “unable to pay its debts” if it is unable to pay its debts as they fall due, or where its assets are worth less than its liabilities.
In draft guidance published earlier this year, HMRC stated that a material risk of insolvency would require a significant risk of insolvency of “real concern” to the directors. The draft guidance lists the type of thing to look out for:
- likely breaches of financial covenants, negotiations with third party creditors over the release or restructuring of the debt
- enforcement action by creditors
- adverse trading conditions with no prospect of recovery, failure of a material customer or supplier, redundancies, business disasters, ligation that the company may not be able to meet
- management accounts, reports and forecasts showing material cash flow shortfalls
- qualified audit reports or accounts prepared on a break-up basis
- an insolvent balance sheet.
Helpfully, the draft guidance also states that the fact that the threshold is met will not automatically mean that by continuing to trade the directors will be in breach of their statutory duties under the Companies Act 2006 or guilty of wrongful trading.
In practice, the success or otherwise of the legislation will depend upon the approach taken by HMRC towards whether or not the threshold condition is met.
Contrary to expectations, the draft legislation did not find its way into this year’s Finance Bill, although the Government does still appear to be keen on the idea, stating that it will apply retrospectively to any release of a debtor relationship entered into on or after 1 January 2015. Even so, it is not clear at present when the legislation will come into effect.