Tax

Debt Restructuring – could your company benefit from the Corporate Rescue Exemption?

Claire McKay Claire McKay

There were 73 company insolvencies in the last quarter of 2018 in Northern Ireland alone according to the Office of National Statistics.

The Government have recognised that companies were under an increased amount of commercial pressure and, in an attempt to facilitate companies restructuring their debt to avoid insolvency; in 2015 they introduced a provision for tax relief for companies in financial difficulty.  Broadly the provisions apply to allow companies in financial distress to reduce their debts without incurring onerous tax liabilities, as long as certain conditions are met.

Prior to the introduction of these ‘corporate rescue’ rules, if a company released debt to a unconnected third party, this would lead (in the majority of cases) to a corporation tax charge being imposed on the amount by which the debt was reduced.  In effect, a reduction in debt of £200,000 could cost the company £38,000 in Corporate Tax (at the current Corporation Tax rate of 19%), not an attractive prospect to a company already in financial distress.  An exemption may have applied to ensure that that debt reduction would not have resulted in a tax liability but only if the company was already in an insolvency process.

Debt for equity swaps would also have been a common option for companies to reduce their debt without incurring a tax charge, however, this option was not always commercially viable, especially for a company in distress.

The corporate rescue rules can now provide an exemption, whereby the credit arising on the amount by which the debt is released is no longer taxable, subject to certain conditions applying. For the rules to apply it needs to be ‘reasonable to assume’ that without the release of debt there would be a real risk that, that the company would be unable to pay their debts within the next twelve months.

For HMRC to agree that it is ‘reasonable to assume’ that this is the case there  must be a realistic likelihood of the company going into insolvency in the next twelve months if it was not for the release of the portion of the debt in question.

Before using the ‘corporate recuse rules’ the company must gather evidence to support the ‘reasonable to assume’ argument.  They should ensure that they have a robust filing positing with HMRC which might include evidence such as management accounts, financial forecasts or evidence of a debt covenant breach.  It is best to consult with an Insolvency Practitioner first to advise on the process.

Care should be taken that all conditions of the corporate rescue rules are met before any relief is claimed, as should HMRC consider the rules not to apply, a Corporation Tax liability on the debt released would be an unwelcome result.