Lee Sharpe considers some relatively obscure anti-avoidance legislation, and how it may apply to smaller family companies.
The loan relationships regime applies specifically to companies (CTA 2009, s 292 et seq.). A write-off of a debt by a lending or creditor company may be ineligible for tax relief – even if the corresponding adjustment in the other company that benefits from the release is still taxable – where the loan arguably has an ‘unallowable purpose’.
Although less common, any interest or similar finance costs to fund that unallowable purpose might likewise not be allowable.
Background
A loan relationship is a ‘money debt that arose from the lending of money’, so an inter-company loan between two family companies is a loan relationship. But if, say, one company pays for some stock for another company, and then recharges that through the inter-company loan account, that would not be a vanilla loan relationship – there was no initial loan.
Even so, the regime is extended by ‘relevant non-lending relationships’ (RNLRs) – money debts that did not derive from the lending of money and, more particularly, any interest, impairment debits (e.g., bad debts) and debt release transactions in relation to those RNLRs. Hence, writing off the loan balance attributable to the aforementioned inter-company recharge would likely fall within that expanded scope.
The loan relationship regime attempts to standardise the treatment of most corporate debt. It starts off simply enough, with two key rules:
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Tax treatment follows the accounting treatment (so long as the latter was made under generally accepted accounting principles (GAAP)).
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There is no capital or revenue distinction; so, for example, a debit or impairment expense is potentially tax-deductible irrespective of whether it would be taken through the profit and loss on revenue account, or the balance sheet as capital.
However, these rules are soon engulfed in a morass of exceptions.
Unallowable purpose
One of those exceptions is the ‘unallowable purpose’ rule, which states that a company may not obtain relief for a debit in respect of a loan that has an unallowable purpose (CTA 2009, ss 441, 442).
An unallowable purpose is one that is not ‘amongst the business or other commercial purposes of the company’.
That unallowable purpose is tested across the accounting period in question, by reference to:
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why the company is a party to the loan relationship; or
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why the company has entered into a related transaction – such as any acquisition or disposal of rights under the loan relationship (e.g., a full or partial surrender, or release of the debt).
It follows that a loan relationship may originally come about for perfectly acceptable reasons, but then acquire an unallowable purpose later on; likewise, deciding to write off a balance on an otherwise acceptable loan relationship can amount to a ‘related transaction’, which in turn means that the overall loan relationship acquires an unallowable purpose for that accounting period.
Tax avoidance motive
You might think this was challenging enough already, but the legislation contains a trapdoor to a deeper level. Simply put, the rules so far allow HMRC to try to disallow something that it dislikes in particular. But if HMRC ascribes a ‘tax avoidance purpose’ to the loan relationship (or related transaction), the legislation effectively assumes the loan relationship has an unallowable purpose by default, unless the company can show that tax avoidance was not the main purpose, or one of the main purposes, of the loan relationship or related transaction.
Most of the higher-profile cases covering unallowable purpose have involved complex financing arrangements in a group structure, but the case that this article focuses on is much less exotic, so it should be more relevant to non-specialist agents and advisers.
Keighley and Primeur Ltd v HMRC
At the heart of Keighley and Primeur Ltd v HMRC [2024] UKFTT 30 (TC) was a claim to relief for the cost of writing off a loan.
A company (Primeur) had lent circa £500,000 to another company (VDP), secured against a property in VDP. Two individuals held the majority of the shares in either company (with each holding only a minority interest). Those two individuals had also lent money to VDP personally, at a similar scale to the loan from Primeur. VDP then sold the property, but still did not have sufficient funds to repay Primeur and those individual lenders in full. Primeur took a write-off on its loan to VDP, while the individuals were repaid their unsecured loans in full – to recognise the effort they had made personally to help VDP to sell the property.
To emphasise: with common director-shareholders in both companies, the directors in the lender company Primeur had agreed that Primeur refrain from exercising its secured rights to full recovery, with the result that two of the director-shareholders were able to obtain full recovery of their unsecured personal loans to the debtor company VDP (VDP had enough funds to repay Primeur in full, but not Primeur and the individuals in full).
Primeur then tried to secure tax relief for the formal write-off (release) of its secured lending to VDP, being that avoidable shortfall.
HMRC objected to the tax deduction for Primeur’s loan impairment, arguing that either:
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the companies were ‘connected’ so no relief was due (see below); or
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the loan write-off itself meant that the loan had an unallowable purpose in that accounting period of the write-off, so the write-off should not be deductible.
The tribunal decided that HMRC lost on (1) because the companies were not connected for the purposes of the loan relationships regime. As regards (2), however, the tribunal agreed with HMRC that Primeur’s deciding to forego its secured rights was not ‘amongst the business or other commercial purposes of the company’. Therefore, there was an unallowable purpose and tax relief for the write-off should be denied to the company.
Possible counters to unallowable purpose disallowance
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It’s not actually a loan relationship – Not all monetary debt amounts fall within even the expanded scope (including RNLRs). In CJ Wildbird Foods Ltd v HMRC [2018] UKFTT 341 (TC), the taxpayer company made several substantial loans to another company; the lending company then claimed relief for large write-offs on the basis that they were very unlikely to be recoverable in the foreseeable future, so it was correct under GAAP to “make a bad debt provision”. HMRC then tried to argue that these were not really loans but capital contributions. The tribunal disagreed and found that they were indeed within the loan relationship regime. Ironically, sometimes the taxpayer may try to adapt HMRC’s argument, wanting to escape the regime.
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The companies are ‘connected’ – The ‘third key rule’ (see introduction above) is that no debits or credits are allowable in respect of loan relationships between connected parties (as defined for the regime but broadly as one might expect). In Keighley, the tribunal held that the companies were not connected, despite the shareholders’ aggregate majority shareholding in both companies, because of the significant restrictions on their powers imposed by a third minority shareholder.
Initially, disallowing any deductions under this connection test might seem just as bad but the connection test broadly secures the symmetry that any corresponding adjustment in the borrowing company will not be taxed. Despite the judge’s comments about halfway through Keighley that might have you think otherwise, the unallowable purpose test is different: it does not guarantee that symmetry but focuses primarily on restricting relief for deductions.
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Non-binary – one might assume that a loan either has an unallowable purpose, or it does not; but the legislation explicitly sets out that any tax adjustment may be apportioned on a just and reasonable basis.
Conclusion
On basic principles, a formal loan write-off, just as with writing off a bad trading debt, should be allowable. Or, it will also quite often be the case that the companies are connected, so any debits that are disallowed in the lending company will be balanced by the mirror adjustment in the borrowing company going untaxed. But not all companies run by a family will automatically be connected one with the other (e.g., one sibling owns one company; another owns a second company, and they are not acting in concert to control both together).
HMRC overhauled its ‘unallowable purpose’ guidance in 2023 and in May 2025 (see its Corporate Finance Manual at CFM38100 onwards), which suggests it is popular with HMRC. Their 2024 win in Keighley may well prompt them to test the scope more extensively for loan write-offs in those family companies that do not benefit from the balance implicit in connected party status. Companies and their advisers should be mindful that the tax treatment of loan write-offs or releases may be less straightforward than perhaps previously assumed.
