Company in financial difficulty: debt releases and the corporate rescue exemption
Short version. The corporate rescue exemption can keep a company debt release credit out of its Corporation Tax calculation. It applies only when the conditions in CTA 2009 section 322(5B) are met. The company decides the treatment for its return.
CTA 2009 section 322(5B)
Condition E applies to qualifying releases on or after 1 January 2015. The release must be neither a deemed release under section 358(3) nor a release of relevant rights. Immediately before the release, it must be reasonable to assume that, without the release and any arrangements of which it forms part, there would be a material risk that at some time within the next 12 months the company would be unable to pay its debts. Section 322 also requires a release of a liability under a debtor relationship in an accounting period where an amortised cost basis is used for that relationship. Read the full statutory wording.
A debt release can also satisfy the separate debt-for-equity condition in section 322(4). HMRC says the two conditions can overlap. The accounting treatment still matters. A release credited wholly or partly to equity is outside #Simple CompanyTax's director loan waiver route.
Material risk and the 12 month period
HMRC says a company is unable to pay its debts if it cannot pay them as they fall due, or if its assets are worth less than its liabilities after contingent and prospective liabilities are considered. Material risk means a real prospect of insolvency. A temporary cash-flow difficulty or mere possibility is not enough. The risk must be of inability to pay debts at some time within 12 months after the release. The rescue arrangements do not all have to complete within those 12 months.
Worked example and common mistakes
Suppose a company has a £10,000 loan liability and the creditor releases it. If the whole £10,000 is recognised as a profit and loss gain, the accounts show that gain. If the company judges that condition E applies, the Corporation Tax computation removes the £10,000 credit. This example illustrates the calculation. It does not establish that a particular company meets the legal tests.
- Stopping trade is not, by itself, the test for condition E.
- The risk is assessed immediately before the release, without the release and related arrangements.
- Check the full section 322 conditions. A label such as rescue or capital contribution does not establish an exception.
- A release credited to equity needs a different accounting route from a full profit and loss gain.
#Simple CompanyTax offers a statutory exception choice for a cash loan release whose whole amount is a profit and loss gain. The choice is the company's.