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30 March 2023

Campaign builds to scrap tax on small changes to company debtCampaign builds to scrap tax on small changes to company debt

09 March 2023

A recent decision by HMRC on small changes to corporate debt means that some corporate rescues may continue to fail because the tax charge “is the straw that breaks the camel’s back”.

That is the view of the chairman of R3’s tax committee Marcus Rea who has called on practitioners to support a campaign to reverse the decision.

Since 2015, “substantial” changes in debt can be exempt from tax when a company is being restructured if it can be shown that there would have been a material risk that the company would be unable to pay its debts within the next 12 months.

The tests for whether a debt change is substantial include whether the net present values of the cashflows associated with the debt are changed by 10% or more.

However, if the debt changes are defined as small, or “non-substantial”, then there is no exemption.

“A sub-10% adjustment to cashflows on a debt could still be a significant number in the context of an individual business and yet there is no statutory exemption for corporate rescues in this instance,” said Rea.

“Paradoxically, this encourages greater changes to debt terms than might otherwise be negotiated in order to access the substantial modification safe harbour.”

According to Rea, who is also a partner at Teneo, “the Revenue has offered to revisit its decision” if they can be shown that the absence of an exemption has caused “significant difficulties in specific corporate rescue situations”.

“I would encourage practitioners to inform R3 of any issues that arise with non-substantial modifications so that we can produce a body of evidence demonstrating the need for change,” he said.

Rea explains the implications of the ruling for IPs in more detail in ‘Tax rule ‘straw’ that risks breaking corporate rescues’ in the Spring 2023 edition of Recovery magazine.

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