CFM33165 | Loan relationships: core rules: pre-2016 rules: GAAP: example

This guidance relates only to company periods of account beginning before 1 January 2016.

GAAP: example

Q plc acquired shares in a new subsidiary for £10 million. It paid the vendor company £8 million in cash, and issued loan notes for the remaining £2 million. Subsequently, Q plc found out facts about the financial position of its new subsidiary that had not come to light in the due diligence process. Discussions with the vendor company followed, as a result of which it was agreed that the purchase price should be reduced by £1 million. Accordingly, £1 million of the loan notes issued by Q plc were cancelled.

It accounted for the transaction as:

For tax purposes, the loan notes were debtor loan relationships of Q Ltd. since, although there had been no lending of money, an instrument had been issued representing security for the creditor’s rights under the £2 million money debt.

The cancellation of £1 million of the notes did not, however, give rise to a tax charge under the loan relationships rules. Although a credit appeared in the company’s books, there was no amount that has been recognised in determining the company’s profit or loss for the period.