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CTM55710 - Loan relationships: bad and doubtful debts: position of creditor: applicable circumstances

FA96/SCH9/PARA5 sets out the circumstances when ‘a departure from the assumption.... that every amount payable under a loan relationship will be paid in full’ is allowed. In other words, the circumstances when relief for bad and doubtful debts is allowed.

Paragraph 5 does not apply in all circumstances where a creditor uses an accruals basis - it does not apply where the creditor is connected with the debtor. For more information on connected parties see CTM53800 onwards and for bad debts and connected parties, CTM55100 onwards.

Where paragraph 5 does apply to creditors using an authorised accruals basis and which are unconnected with the debtor, it applies equally to loan relationships to which the creditor is party for non-trading or trading purposes. This is an important change - in the past, apart from certain specified circumstances (for instance, where TCGA92/S253 or TCGA92/S254 applies or where a capital loss was generated as a result of a negligible value claim), bad debt relief was only available on loans made on trading account, e.g. by a moneylender, profits on the sale of which would have been brought into account as trading receipts.

Creditor companies can have relief in three circumstances -where and to the extent that:

  • a debt is a bad debt,
  • a doubtful debt is estimated to be bad,
  • a liability to pay any amount is released.

Bad debt

It is a question of fact whether a debt is bad. Although in contrast to ICTA88/S74 (1)(j) there is no requirement that the bad debt must be proved to be bad, the two provisions are similar in scope. If a debt has been written off in a company’s accounts rather than merely provided against, this suggests that it is prima facie a bad rather than just a doubtful debt. However, unlike S74(1)(j), FA96/SCH9/PARA5 applies to ‘non-trading’ debt as well as to ‘trading’ debt, the profits on the sale of which would have been brought into account as trading receipts.

Doubtful debt

Relief is due for doubtful debt to the extent that it is estimated to be bad. A general provision is not allowable. Any provision against partial or complete irrecoverability must represent an estimate specific to the loan relationship and to the circumstances of the debtor. Again, there is no practical difference between the scope of FA96/SCH9/PARA5 and that of ICTA88/S74 (1)(j), except that paragraph 5 also applies to ‘non-trade’ debt.

Release of debt

Releases of debt are comparatively rare.

A debt is released only when the creditor has formally waived the debtor’s obligation to repay. The writing off of a debt in a company’s accounts is not a release, because in that situation the debtor’s obligation to repay usually remains.

Where a debt has been released in full, then when the release is unconditional the creditor will cease to be party to that loan relationship - it has effectively disposed of the loan relationship. The loss on disposal will be brought in as normal as a debit.

Information on the position of the debtor where a debt is released is given at CTM55510.