Chapter 10 Loan relationships – connected companies Flashcards
10.1 Definition of connected companies
Connected companies mean that one company controls the other or both companies are controlled by the same person. Controls means holding shares, possession of voting power or as a result of powers conferred by the articles of association.
10.2 Amortized cost and fair value
Where a company has a loan relationship it must be included in the financial accounts, either using the amortized cost or fair value. Amortized cost is measured by:
b/f loan + interest accrued – repayments = c/f loan
fair value is the amount the company could sell the loan relationship for, or the amount the company would have to pay to settle the relationship, based on arm’s length transaction. Loans between connected parties must be accounted for using amortized cost. A loan relationship with an unconnected company must also use the amortized cost if there is a qualifying link to one or more loan relationships between connected companies.
10.3 Impairments and released debts
Impairments – made when the loan is worth less than the value in the accounts. This could be because it is a bad debt (uncollectable) or because it carries interest at an uncommercial rate. An impairment between unconnected companies results in an expense in the creditor company. If the companies are connected, no expense is allowable.
Releases – occurs where the creditor company informs the debtor that there is no longer an obligation to pay the debt. This could be because the debt is impaired, or due to some other agreement or the debt becoming legally unenforceable. A release in unconnected companies results in an expense in the creditor company and income in the debtor company. If the companies are connected then:
• No expense is allowable in the creditor company
• No income is taxable in the debtor company
For a loan to be released, consideration should be given for the release or a deed of release should be drawn up formally releasing the debtor from any obligation to pay.
10.4 Late interest payable to participators in close companies
Interest is generally based on an accrual’s basis. However interest is deductible when it is paid if:
• It is payable to a participator (or their associate) in a close company, and
• It has not been paid within 12 months of the end of the accounting period, and
• It has not been taxed under the loan relationship rules in the hands of the recipient
A close company is a UK company which is controlled by five or fewer participators or any number of participators who are directors and is not controlled by a non-close company.
Where a company is controlled by a non-UK resident company, the non-UK resident company is treated as a close company if it would have been close had it been UK resident. Interest is not taxed under the loan relationship rules if it is received by an individual or a non-UK resident company that is resident in a non-qualifying country.
