For periods of account ending on or after 1 April 1996 the
position is governed by FA96/SCH9/PARA8. Full commentary on this
and related provisions of FA96 are found in the Banking Manual. If
it appears that the restrictions on relief for bad or doubtful
debts in paragraph 8 could apply in a non-banking case advice
should be obtained from CT&VAT (Technical).
Many lenders have made large provisions in respect of loans
to a number of countries mainly in South America, Eastern Europe or
the ’third world', for which they claim relief under
ICTA88/S74 (j) as ’doubtful debts'. The quantification of the
allowable provisions can cause considerable difficulty. In
addition, lenders may also sell the loans on the secondary market
at much less than face value. Most of the loans concerned will have
been made by banks, but this is not necessarily always the case.
FA90/S74 introduced Sections 88A, 88B and 88C into ICTA88
Chapter V Part IV (computational provisions). The purpose of the
new Sections was to remove uncertainty about the extent to which
such doubtful debt provisions qualify for relief under Section 74
(j), and to control the cost to the Exchequer of further provisions
and losses on the disposal of the debts.
The Sections apply only to loans, usually called `sovereign
debts', owed by:
or
or
They do not apply to:
or
The Sections may also apply to debts owed by overseas private
sector concerns, repayment of which is affected by the intervention
of overseas government. An example of this would be the imposition
of restrictions on repayment of the debts in the currency in which
they are due.
ICTA88/S88A and S88B apply to any period of account ending on
or after 20 March 1990. ICTA88/S88C applies to disposal of debts on
or after 20 March 1990.
The amount of the debt which is to be regarded as
‘doubtful' for the purposes of Section 74 (j) is not to
exceed the percentage (the ’relevant percentage') to be
determined in accordance with the Regulations (Section 88B). This
section also restricts the rate at which tax relief for further
provisions may be allowed.
The original Regulations providing for the relevant
percentages' for the purposes of Section 88B were contained in
SI1990/2529 and these broadly mirrored the Bank of England's
matrix, although there were some important differences. A revised
set of Regulations was introduced by SI1993/1623, and came into
force with effect from 30 June 1993. These Regulations continue to
mirror the Bank of England matrix, which itself was revised with
effect from 30 June 1993. The basic framework and way in which
these Regulations operate is different only in detail from the 1990
Regulations.
The deduction for a loss made by a lender in disposing of a debt at less than face value is restricted to 5% per annum of the face value of that debt (Section 88C). This restriction does not apply, however, if the lender disposes of the debt to the debtor.
