New regulations on ‘loan relationship’ for taxing businesses on debts will be implemented next year, with the HMRC indicating that they will grant extended tax relief privileges to businesses in a greater number of cases of corporate rescue.

The HMRC identified their intention to implement a new exemption to supplement the existing debt release exemptions which will be applicable to a higher number of different corporate rescues. The new rule will apply to “consensual debt restructuring aimed at early remedial action to avert financial distress”. Moreover, it will address cases where creditors are unable to attain equity in their debtor’s company, due to commercial reasons.

The HMRC also suggested that the government are in the midst of deciding whether the exemption should apply to the accounting revaluation of liabilities, which is often undertaken by a business as part of an ‘amend and extend’ restructuring of debt. For all who are unfamiliar with the concept of ‘amend and extend’, they are simply arrangements where a creditor and debtor both agree to loosen the terms and conditions of a pre-existing loan arrangement, usually to extend its overall term, so that the debtor can avoid defaulting.

The existing regulations for taxing corporate debt or loan relationships were devised back in 1996, and currently consist of the profits being taxable and the expenses being left untouched, in adherence with the accounting conduct toward the debts. The HMRC have identified that without clearly specified, individual exemptions, releasing debt could incur a possible tax liability for the debtor business.

Further changes to anti-avoidance regulation expected

Another important measure outlined by the HMRC and set for introduction is a new anti-avoidance regulation that will universally apply to all companies in the UK. They argued that the introduction of this rule is “an important element in achieving improved anti-avoidance protection” and in “reducing the need for new and complex anti-avoidance rules to deal with new attempts at avoidance in future”.

The new regulation will apply where there are loan arrangements which are mainly targeted at acquiring a tax advantage; in terms of taxable sums under the current loan relationships and derivative contracts regulation.

The final composition of the rule has yet to be confirmed, though the HMRC have highlighted that it will seek to prevent company’s acquiring the aforementioned tax advantage and will result in the repeal of “certain existing anti-avoidance rules”.

If this does manifest in reality, it will likely incur a polar reaction. The new found flexibility when applying tax reliefs during corporate rescue is undoubtedly a positive aspect of the new regulations, though the lack of clarity on the new anti-avoidance regulations and the status of the general anti-avoidance rule (GAAR), will likely cause murmurs across certain business circles across the UK.

Changes to ‘unallowable purpose’ regulation

Modifications to the ‘unallowable purpose’ regulation will also be looked at by the government, though this will be done so on conditional grounds, the HMRC identified. In its current carnation, the unallowable purpose regulation stops any business from acquiring a reduction in their debits incurred in regards to any loan where the reasons the business acquired it in the first place consist of a purpose “which is not amongst the business or commercial purposes of the company”.

This is despite the fact that many company shareholders in the UK have brandished the modifications ‘unnecessary’, though the government has argued that they “continue to consider that some changes, at least, have the potential to improve the clarity of the application of the rule”.

One of the primary reforms that is being pushed for by the government is the implementation of a clear definition of a ‘related transaction’, which refers to the handling of set-off credits on derivative contracts where debits are constricted as they fall into the category of an unallowable purpose.

New procedure for determining taxable amounts

The government has also identified that they have given the green light to a new procedure for calculating taxable sums on loan relationships and derivative contracts, which will see them regard the profit and loss data of indebted company as the initial point to look at when determining how much to charge them.

Under the existing regulations in this area, the government takes into considerations amounts that are utilised for accounting purposes whenever they show on the account books. This applies to amounts in reserves, equity or ‘other comprehensive income’ (OCI).

The HMRC argued that amounts typically regarded as OCI are eventually ‘recycled’ to loss or profit, so the primary aim of the modification is in regards to timing. They highlighted that the new regulations “take appropriate account of non-recycled items and the possibility of deliberate manipulation of accounting rules for tax avoidance purposes”.

They argued that the impact of the reforms will mean that amounts that are related directly to equity would no longer be taxable, though this will be on a general basis rather than a universal one. They are set for implementation for accounting periods after the 1st January 2016, though some of the anti-avoidance regulations might be instigated earlier.

Changes to ‘late paid interest regulation’

The final major reform that the government has provisionally agreed to is the modification or complete overhaul of the ‘late paid interest regulation’. The regulation currently stops businesses from attaining tax relief during the time that it accrues for interest paid in regards to loans from associated businesses in specific areas where the interest is paid over 12 months after the timeframe in which it accrues. In cases such as these, tax relief is only available for acquisition following the full payment of the interest.

The HMRC argued that whilst it has taken into account the apprehensions of some of the business directors it consulted, with many arguing that it is a necessary regulation in order to help insurance firms optimise their loss relief capabilities, that nevertheless it will continue to consider the reform” while in the meantime remaining of the view that an anti-avoidance rule is not an appropriate vehicle for tax planning”.

The government also confirmed that they will not go ahead with previous proposals that suggested that loan relationship and derivative contract regulations could be combined to form a single body of legislation. They also outlined that they will not implement any major modifications to ‘group continuity’ regulations, but did not rule out revisiting the issue in the future.