Tax

HMRC has recently updated its published guidance on the scope of the debt restructuring exemption (the “Exemption”) contained in the UK corporate interest restriction (“CIR”) regime. The update clarifies that, in certain situations, where a pre-existing loan is replaced by a new loan as part of a restructuring that new loan may be treated as a continuation of the pre-existing loan for the purposes of the Exemption. This may help mitigate adverse consequences of certain debt restructurings that may reduce a debtor’s interest capacity under the CIR regime.

Detail

In summary, the purpose of the Exemption is to ensure that, in certain distressed scenarios, where a debtor and creditor become “related” parties in consequence of a partial release of a pre-existing loan, any unreleased portion of the loan continues to be treated as non-related debt for the purposes of the CIR rules. This mitigates (unexpected) adverse tax implications that may otherwise arise as a result of reducing the debtor’s interest capacity at a time when the debtor is in distress.

By way of example, this could be relevant where there is a partial equity capitalisation of debt such that, post-capitalisation, the debtor and creditor become “related” but there remains a debt as between the two parties.

Although HMRC’s guidance notes that the Exemption applies to pre-existing loans (and not to new loans), the updated guidance clarifies that, in certain situations, where a pre-existing loan is replaced by a new loan, the new loan may be considered a continuation of the pre-existing loan for the purposes of the Exemption.

Where there is any doubt as to application of the Exemption, taxpayers can either seek clarification from their Customer Compliance Manager or submit a non-statutory clearance application.

Final remarks

Following on from the recent update by HMRC on the impact of insolvency on VAT groups (covered in our prior post), this HMRC update provides a further useful reminder of the importance of considering the tax impact of distressed restructurings.