Most accountants will know a little bit about loan relationships – the taxation of corporate debts. Throughout my career as a corporate tax adviser those two words have typically struck fear into the most experienced of advisers. This is (and always has been) a hideously complicated regime full of exceptions, exceptions to exceptions and much more that confuses.
We’ve had a number of major changes to the loan relationships regime since its inception in 1996 (?), but one of the fundamental parts of the loan relationships legislation has been that however the relevant debits and credits are accounted for they were within the scope of the regime. That all changed for loan relationships entered into in an accounting period beginning on or after 1 January 2016, the tax analysis is now much more tightly drawn to the accounts – albeit with some exceptions of course, including a grandfathering provision for those loan relationships entered into in accounting periods beginning prior to 1 January 2016 which seems to point to us having ‘old’ and ‘new’ loan relationships – excellent, more confusion.
It also means that understanding the accounting is exceptionally important. If the accounting takes the debit or credit straight to equity, and is a loan relationship entered into in an accounting period beginning on or after 1 January 2016 then my reading is that this is not taxable because it won’t ever hit the P&L.
It’s therefore reassuring that there have been no major changes to the accounting standards for company accounts in recent years…………..of course I say that in a tone dripping with sarcasm. There have been many developments in that area and most accountants are confused to some extent about the exact accounting in a variety of debt related circumstances, particularly as a result of the introduction of FRS102 which makes many changes in that area.
The added problem is that all of these new changes both to the tax elements and the accounting elements have been changing at different points in time. Tax legislation has been trying to catch up with the changes to accounting standards. HMRC has issued some very basic guidance on these changes, particularly around FRS102, but by their own admission that guidance (last updated 12 August 2016) is rudimentary and should not be relied upon without taking advice! Most commentary that I have seen written on this subject is still at the stage where it merely repeats the legislation and crucially there is very little in the way of thinking / explaining how the new rules will affect common transactions, particularly in the context of SMEs and larger unquoted but family owned companies.
Add to that we have the new corporate rescue exemption now in place, which is great in principle but feels like it will need to be accompanied by HMRC clearance because of certain subjective elements, and the landscape is clearly complex.
Whilst my tendency when anyone mentions loan relationships is cower and hide if I can, my fear is that all of the above is an issue that cannot be avoided if you profess to be a corporate tax adviser in 2016. Indeed we plan to write some detailed non-specific guidance for our clients in due course once the dust has begun to settle on all of this. Loan relationships are complicated, as is the accounting potentially, and the two are now very much intertwined with one another.
My advice is that where clients ask you to write off debt or seek to restructure it in some way, and the numbers are reasonably big you ensure you get your ducks in a row and seek a second opinion on both the accounting and the taxation elements – or you can read through all of the recent and complex changes to the legislation and try to come up with the answer yourself. I know I will be looking to one of my corporate tax partner colleagues in Francis Clark to get a second opinion at all times!