CFM81410 - Old rules: loan relationships: consortia and bad debts: group relief restriction
Restriction based on earlier bad debt relief
This guidance applies to periods of account beginning before 1 January 2005
Where bad debt debits had already been given for any previous period that began on or after 1 October 2002 in respect of loans to a consortium company, FA96/SCH9/PARA5A(12) potentially restricted the amount of group relief that group members may claim in subsequent periods.
Para 5A called past bad debt debits the 鈥榗umulative net amount of relevant net debits for earlier group accounting periods鈥�. Para 5A(13) explained how to calculate this amount. It was the
- relevant net debits (the excess of bad debts over recoveries) for each group accounting period, less
- reductions that were made to those debits for those periods under Para 5A(6).
That past bad debt relief then potentially reduced the amount of group relief that may be claimed in the next succeeding period.
How the restriction worked
The FA96/SCH9/PARA5(12) restriction could be reduced to a formula. In broad terms, group relief of a period was potentially restricted (but not below nil) by the amount of bad debt debits allowed in previous periods. However, the restriction was not applied to the whole group relief claim, only the 鈥榯op slice鈥�. That is, the amount (if any) by which the group relief claim exceeded the bad debt debits of the same period. This notional 鈥榮licing鈥� of the group relief claim was needed to maintain the statutory approach (which remains the case) that
- bad debt relief is restricted in priority to group relief
- group relief is only restricted as a last resort.
Example
In Example 2 at CFM81390, MC Ltd wrote off 拢40,000 of a loan to a consortium company and made a claim to group relief from the consortium company of 拢16,000. The debit for bad debts was reduced to 拢24,000 by the group relief claimed of 拢16,000.
In the following year, there was a further bad debt debit of 拢20,000 and a group relief claim of 拢38,000.
Restrict bad debts by group relief
Para 5A(6) would have reduced the bad debt debit to nil as the group relief claim exceeded 拢20,000.
Restrict group relief by earlier bad debts
Para 5A(12) then would have reduced the group relief claim of 拢38,000. However, the restriction only applied to the top slice: - the excess of
| group relief claim | 拢38,000 |
|---|---|
| new bad debt debits | 拢20,000 |
| 听 | 拢18,000 |
Cumulative past bad debt debits were 拢24,000; so group relief would have been reduced by the maximum amount, 拢18,000. The group relief claim would then have been 拢38,000 - 拢18,000 = 拢20,000.
Cumulative bad debt debits to carry forward and use in restricting group relief under Para 5A(12) in subsequent accounting periods would have been 拢24,000 - 拢18,000 = 拢6,000.
Overall result
Para 5A(6) would have reduced bad debt debits from 拢20,000 to nil.
Para 5A(12) would have reduced group relief from 拢38,000 to 拢20,000.
Where there was more than one bad debt and/or group relief claimant, those reductions would have been apportioned between them.