CW Energy LLP

Loan relationships between connected companies – a change in accounting policy

For accounting periods commencing on or after 1 January 2015, companies that are changing the basis of preparation of their accounts from Old UK GAAP to IFRS or New UK GAAP (applying either FRS 101 or FRS 102), need to consider carefully the transitional adjustments needed for tax purposes when restating the brought forward balances.

Some companies which have changed their basis of accounting have experienced uncertainties in connection with the treatment of connected party loans arising on either non-interest bearing loans or where loans were entered into on non-market terms. We have for example seen some advisors suggesting that accounting adjustments on connected party debt may need to be brought in for tax purposes. This has not been our view (see for example our newsbrief dated August 2013 https://cwenergy.co.uk/planning-for-accounting-changes/)

HMRC have now issued updated manuals dealing with the impact of the changes in accounting policy and have clarified in their manuals the application of the loan relationship rules when there is a loan relationship between connected companies and where a company changes its accounting policy. This guidance confirmed that the connected company loan relationships legislation that requires the use of an amortised cost basis in accordance with Section 313 CTA 2009 for tax purposes means that there is no initial measurement of such assets and liabilities at fair value for tax purposes. Therefore, there should be no adjustment in respect of these items for tax purposes when a company moves to New UK GAAP or IFRS. Companies will need to ensure that any such adjustments in the accounts are identified and appropriatly dealt with from a tax point of view.