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Article Index
Budget 2009 Commentary
Temporary return of first year allowances
Another year to carry losses back
Tipping the cashflow scales
Carbon-based company cars
Further obligations for internal company accountants
Preferring to be part of a group?
A simple option for VAT on property
2010 - a big year for football and VAT
Connected companies' loans
Developments on the green horizon
Foreign denominated losses
Gambling with the rules
Rates and limits
HMRC becomes more powerful

Budget 2009 commentary courtesy of Grant ThorntonBudget Comment 2009

Connected companies' loans

The Chancellor has made two announcements in today's Budget confirming new measures in relation to loans between connected companies. Connected companies, for these purposes, include companies which are under common control or companies where one is under the control of another, most commonly where companies are members of a group.

The first announcement outlined the changes to legislation which will be included in the Finance Bill to ensure that a company is not charged to corporation tax on the release of a trade debt between connected companies. Currently, where a trade debt is released between connected companies, the 'debtor' company is denied tax relief on the debit, however, there is no statute which exempts the credit from being taxed.

It was previously announced that there would be measures to correct this in the 2009 Finance Bill and the announcements in today's Budget have confirmed this will take effect for releases of debts from 22 April 2009. The release of trade debts between connected companies will now match the treatment of the release of a loan.

The second change in respect of connected company loans relates to 'late paid interest', that is, interest which is not paid within 12 months of the end of the accounting period in which it is accrued. These rules previously applied to companies where the creditor company was within the charge to corporation tax, but the debtor company was not. It therefore most often applied to loans between UK companies and overseas entities. These rules also applied to loans between UK companies and their participators.

Following decisions in the European Court of Justice, HM Revenue & Customs (HMRC) accepted that the current rules could not be maintained and embarked on a consultation process. In the meantime, it issued a Brief in July 2008 which allowed certain companies to obtain deductions for their interest on an accruals basis as opposed to a paid basis early, pending future legislation.

The announcement in today's Budget confirmed that for accounting periods beginning on or after 1 April 2009, certain companies (those where the creditor is a 'connected company', or is a close company participator in the debtor company or where the debtor or creditor has a 'major interest' in the other) will obtain tax relief for interest paid on an accruals basis, regardless of when the payment is actually made. It is important to note that this treatment is restricted where the other party to the loan is resident in a non-qualifying territory. A non-qualifying territory for these purposes is broadly a country with which the UK does not have a double tax treaty containing a non-discrimination clause.

The draft legislation allows companies to elect for the ‘paid basis’ to continue to apply for the first accounting period beginning on or after 1 April 2009. The election must be made in the tax return for the period in question.