Watson Buckle Blog |
|
Loan rules are to change for connected companies
John Kinsella, tax partner talks about how HMRC is introducing new corporate tax legislation that alters the loan relationships rules affecting connected companies.
Announced in the pre budget statement, the new rules will apply to the release of trade debts owed between connected companies. The change will also alter the rules on the late payment of interest between connected companies. These rules will cover both intra-group trade debts and trade debts between non-group companies where an individual controls both companies.
The introduction of this legislation has been bought in as it was deemed that the current system is in contravention of the EU's plans for harmonisation of Europe's tax practices which aims to promote fair tax policy and prevent harmful tax competition.
A creditor that formally releases a connected debtor from a trade debt is denied a deduction for the loss on the debt and may be taxed on its profit. Under the new system, the debtor company would not be taxable on the release. Personally I think the changes are needed as the old rules were clearly discriminatory.
A further change concerns the rule that allows a debtor company a deduction for interest payable to a connected creditor that is outside the loan relationships rules only on a paid basis, rather than on the accruals basis that normally applies.
Harmonisation of tax practices within Europe is certainly helpful when running a business as it will undoubtedly improve tax security.
The changes will be effective for company accounting periods beginning on or after April 1 2009.
John Kinsella
Watson Buckle
www.watsonbuckle.co.uk