»Ê¹ÚÌåÓýapp

Previous bad debt relief

This guidance applies to periods of account beginning before 1 January 2005

A company could only have bad debt relief under the authorised arrangements for bad debt in FA96/SCH9/PARA5(1) where there was no connection between the parties. »Ê¹ÚÌåÓýapp company had also to satisfy the conditions set out in para 5(2): that is, the company must bring in credits where bad debts previously allowed were

• recovered, or
• no longer attracted relief under FA96/SCH9/PARA5(1).

For example, where a company made a loan to an unconnected company, it could bring in debits under the authorised arrangements for bad debt in para 5. If the companies then became connected

• the debt no longer attracted relief
• the company had to assume that all amounts were payable and receivable in full.

»Ê¹ÚÌåÓýapp consequence was that, for tax purposes, the company had to write the debt back up to its full value. This resulted in a credit, effectively clawing back all bad debt relief given before connection.

FA96/SCH9/PARA6B(1)-(4) prevented this claw back if the connection started in an accounting period beginning on or after 1 October 2002, see CFM81190, though subsequent bad debt claims would not have been allowed because of the connection.

Recoveries

»Ê¹ÚÌåÓýapp company would have brought in credits for recoveries only where bad debt relief was previously given.

Releases

Where a debt was been released before the parties became connected, the creditor no longer had a legal entitlement to the loan relationship, so there were no consequences to becoming connected.