CFM20080 - Securitisation: taxation: periods beginning before 1 January 2005: bad and doubtful debts
Bad and doubtful debts
Securitisations, by their nature, require a reliable income
stream – which in turn requires a reliable underlying asset
base. The various credit enhancement structures employed in these
deals – particularly over-collateralisation – should
ensure that there is never a shortfall in funds for the SPV to pay
the third party investors and the originator.
The return of profits to the originator, and the minimal
retention of profits by the SPV, is calculated after bad debts,
including provisions. Generally, it would be unusual to see any
general bad debt provisions in an SPV, unless the method of
calculating the originator’s return was adjusted for such
general provisions, as in the normal course of events it will not
have the funds to meet any additional tax liability.
The usual loan relationship rules on any bad and doubtful
debts apply and bad debt provisions in securitisation SPVs should
be dealt with like any other entity. The same is also true for the
originating entity. It is possible that the originating entity may
carry bad debt provisions for debts which it has securitised and
thus no longer owns. This may be prudent and appropriate in
accounting terms – particularly if the originator is required
to replace non-performing debts as part of its credit enhancement
mechanism (
CFM20050).
In tax terms HMRC would not expect to see a bad debt relief
claim by an originator once an asset had been disposed of in a true
sale securitisation, if the SPV were also claiming relief for a
provision in respect of the same loss. The SPV could be expected to
show accounting provisions in respect of any losses in so far as
the losses in question would ultimately be borne by the SPV itself.
However, if (for example) the losses on the securitised assets
would impact on the originator rather than on the SPV (for example,
by reducing or eliminating flows of profit extraction from the SPV
to the originator), it is possible that any related provisions
would be allowable in the originator (and not in the SPV).
