I am today announcing the Government’s intention to introduce in the next Finance Bill a further change to the rules on how groups of companies are taxed when they buy back their issued debt at a discount to the amount borrowed. The further change is in addition to the changes I previously announced in my Statement on 14 October.
In my Statement on 14 October, I announced that the Government proposed to deal with the circumstances in which companies could buyback their debt at a discount to the amount borrowed without being taxed. I announced changes that would tighten the rules dealing with debt buybacks to ensure that only those debt buybacks that are undertaken as part of genuine corporate rescues will benefit from discount not being subject to tax.
The Statement made clear that even if a company benefited from the discount not being taxed under the new proposals any subsequent cancellation of the debt by the new creditor will result in the debtor being taxed on the previously untaxed discount.
HM Revenue and Customs (HMRC) published more detail on these proposals on 22 October, which clarified the circumstances in which the discount on the debt buyback would not be taxed and the mechanism by which a subsequent release of such a debt would result in the debtor being taxed on the discount.
It has since come to light that groups of companies may be able to avoid the discount, that was not taxed at the time of the buyback, being taxed on the subsequent release of the debt. Groups may be able to achieve this by means of the new creditor accepting ordinary shares in the debtor in order to release the debtor from its liability.
The Government is therefore proposing to introduce additional legislation to prevent this. The new legislation will ensure that where the discount on a buyback is not taxed, any subsequent release of the debt where the consideration for the release is ordinary shares in the debtor or the entitlement to any such shares then the debtor will be taxed on the previously untaxed discount arising on the debt buyback.
The further legislation announced today will have effect in relation to releases of debt that occur on or after today in relation to any debt that was subject of a debt buyback occurring on or after 14 October and to which the proposed legislation announced on 14 October will apply.
Draft legislation will today be published on HMRC’s website covering both the 14 October announcement and today’s announcement.
