Summer Budget: corporate rescue tax exemption not to apply until the autumn

A tax information and impact note (TIIN) issued by HM Revenue and Customs (HMRC) after yesterday's summer budget confirmed the timing of the change.

The new sections were originally intended to apply to the release, modification or replacement of a debtor relationship of a company on or after 1 January 2015. However they were not included in the pre-election Finance Bill.

Eloise Walker a tax expert at Pinsent Masons, the law firm behind Out-law.com said "It's good to see the corporate rescue exemption will finally be coming into law, but anyone who has already acted on the back of its expected enactment will be shocked and disappointed to see that it does not apply to arrangements pre-royal assent, which is poor form."

Walker said that the omission of the provisions from the bill that became law in March had left companies hoping to restructure in an "extremely difficult position".

The loan relationship or corporate debt rules set out how debt is treated for corporation tax purposes. Tax liabilities and deductions are calculated broadly by reference to the accounting treatment of the debt. Without special rules wherever debts are released, tax charges could arise, even if the release is as a result of a restructuring of a company in financial distress. The changes will extend the current rules which apply where debt is exchanged for equity.

The TIIN states that legislation will exclude taxable amounts which would otherwise arise where arrangements are made to restructure the debts of a company in financial distress with a view to ensuring its continued solvency. It states that this will cover situations where debt is released, or where the terms are modified, supplementing and extending the existing rule which exempts credits arising in debtor companies when creditors exchange debt investment for an equity stake.

It is not clear from the TIIN whether any changes have been made to the draft legislation previously published. This provided that the  new relief would be available to debtor companies on release from a debt if it was reasonable to assume that there would be a material risk that at some point within the next 12 months the company would be unable to pay its debts without the release.

The Finance Bill is due to be published on 15 July. However, it is expected that it will not receive royal assent until sometime in the autumn.

In the 2013 budget, the government first announced it was going to consult on a package of proposals to modernise the corporation tax rules governing the taxation of corporate debt and derivative contracts. The consultation took place over the summer of 2013.

Changes to the 'late paid interest' rules in the loan relationship legislation were made in the Finance Act 2015 which became law before May's general election. These changes were designed to prevent group companies from exploiting the late payment rules to get a tax advantage where there was a mismatch between the tax treatment of group companies.