UK's corporate rescue exemption will now apply from start of 2015

The UK government had previously said that the introduction of the exemption would be delayed.

Although the draft legislation for the exemption was first published in December 2014, it was not included in the pre-election Finance Act of 2015. In July 2015, HM Revenue and Customs (HMRC) announced that the introduction of the exemption would be delayed until Royal Assent of the Summer Finance Bill 2015, which is expected to be later this month.

Following lobbying from the restructuring industry the government has now proposed an amendment to the legislation to ensure that the exemption will be available retrospectively to a release, modification, or replacement of a debtor relationship from 1 January 2015.

Tax expert Eloise Walker of Pinsent Masons, the law firm behind Out-law.com, said “I’m delighted to see lobbying efforts pay off and the government see reason on this issue, although it remains disappointing that lobbying was ever needed in the first place."

Walker explained that when HMRC "suddenly said, to everyone's surprise, that Royal Assent would be the start date, there was consternation in certain groups who had relied on the exemption on the promise that it would be effective from 1 January. Anyone who was in that position will be dancing down the streets in sheer relief today."

However, Walker cautioned that "an amendment isn’t actually law until it’s law, although this is one that’s unlikely to meet opposition.”

The loan relationship rules determine how debt is treated for corporation tax purposes. Broadly, tax liabilities and deductions are calculated by reference to the accounting treatment of the debt. Without special rules, wherever debts are released, tax charges could arise for the borrower, even if the release is needed to restructure a company in financial distress. This has previously caused particular problems for entities heading towards insolvency but not yet in formal insolvency proceedings.

The new exemption will apply where it is reasonable to assume that without the debt release (or other related amendments/re-financings) there would be a material risk that at some point within the next 12 months the debtor company would be unable to pay its debts. A company will be "unable to pay its debts" if it is unable to pay its debts as they fall due, or where its assets are worth less than its liabilities i.e. where it is effectively balance sheet insolvent.