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Managing tax liabilities of Covid-19 business debt restructuring

As businesses consider restructuring debt to protect their future, Nigel May, partner at MHA MacIntyre Hudson, says companies must ensure their decisions don’t create unplanned corporation tax issues, and gather evidence to support any corporate rescue exemptions

“Surviving the Covid-19 lockdown and a potentially slow recovery in the aftermath means many companies may need to renegotiate their debt facilities. While commercial considerations always come first, it’s important to ensure debt restructuring doesn’t create an unforeseen tax sting in the tail.

“For corporation tax purposes, tax on debt is governed by the loan relationship rules, where tax generally follows the accounting treatment. When there is a release of a debt, for example a company may find itself negotiating a degree of debt forgiveness with its bankers, the company that has benefited will receive a credit on their profit and loss account. The default position is this will form part of the calculations of profits chargeable to corporation tax, resulting in a tax charge or reduction in losses available.

“However, there are circumstances where it’s not necessary to bring a loan relationship credit into account for corporation tax purposes. One of these is what’s referred to as the corporate rescue exemption.

“In the current environment, ensuring any debt forgiveness meets the requirements of the corporate rescue exemption is particularly important. This requires a reasonable assumption that, without the release of debt, there would be a material risk that at some time in the following 12 months the company would be unable to pay its debts (these terms that form part of the corporate rescue exemption are detailed below). It’s vital the company accumulates evidence to defend its position that debt release was part of a corporate rescue.

“The tax treatment of events are tested long after the fact. Ensuring that contemporaneous evidence is gathered and retained is essential to ensure that, in hopefully a more favourable future environment, the exemption claim can be justified and the tax risk averted.”

The terms for corporate rescue exemption:

  • Unable to pay its debts – the company is unable to pay its debts as they fall due, or the company’s assets will be worth less than its liabilities, contingent and prospective
  • Material risk – looks at what the position would have been without the release or accompanying arrangements. This requires a significant risk of insolvency of real concern to the directors.
  • Reasonable assumption – where HMRC points towards the following examples:

o        likely breaches of financial covenants, negotiations with third party creditors over release or restructuring of debt

o        enforcement actions taken by creditors

o        adverse trading conditions with no prospect of recovery, failure of a material customer or supplier, redundancies, business disasters, litigation that the company may be unable to meet

o        management accounts, reports and forecasts  showing material cash flow shortfalls

o        an insolvent balance sheet

o        qualified audit reports, accounts prepared on a break up basis


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