assignment of debt hmrc

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Release of corporate debt: watch out for hidden tax charges

This article relates to:

In the UK most corporate debt is taxed under a separate set of tax rules known as the loan relationship rules.

It is important to consider the loan relationship rules whenever any corporate debt is to be assigned or released whether as part of a re-organisation, potential sale or general debt restructuring .

When does a loan relationship arise?

A loan relationship arises where a company within the charge to UK corporation tax is a creditor or debtor in respect of a “money debt” and either:

• the debt arises from a transaction for the “lending of money”; or
• an instrument (e.g. a loan note) is issued by any person for the purpose of representing security for, or the rights of a creditor in respect of, any money debt.

Note that a company does not need to be UK resident to be within the charge to UK tax (and the residence and status of the other party to the transaction is also irrelevant).

A money debt is essentially one that falls to be settled by the payment of money (in any currency).

Certain money debts that do not arise from the lending of money and which are not evidenced by an issued instrument, for example FOREX gains and losses, are also brought within the loan relationship rules.

Loan relationships can arise in respect of debt incurred for both trading and non-trading purposes.

The effect of a release of loan relationship debt

Release of debt can spring a potentially nasty surprise for unwary debtors.

As a general rule, a creditor's release of debt results in a taxable credit (profit) for the debtor company and a tax debit (expense) for the creditor. Therefore unless there are losses available to offset against any such taxable credit, the release of a debt may give rise to a tax charge for the debtor which is often overlooked and not factored in to the structuring of any release until it is too late.

Are there any exemptions from the charge to tax?

The general rule is subject to a number of exceptions whereby the release will not give rise to a tax charge for the debtor company. It is therefore important to consider whether any of the exceptions applies before any release of the debt.

In summary, on a release of debt there will be no tax charge for the debtor where:

• the parties are “connected” at any time in the accounting period in which the release occurs. The creditor does not benefit from a tax deduction in respect of the release, but nor is the debtor subjected to a tax charge;
• the release is part of a “statutory insolvency arrangement” (such as a CVA);
• the debtor company is in insolvent liquidation, administration or administrative receivership and the parties are not connected; or
• the release is in consideration of or of any entitlement to an issue of ordinary share capital by the debtor company (a debt for equity swap).

It is anticipated that a further “corporate rescue” exemption will be enacted in the forthcoming Finance Bill which will exempt from tax releases of debts (on or after 1 January 2015) where, “immediately before the release, it is reasonable to assume that, without the release and any arrangements of which the release forms part, there would be a material risk that at some time within the next 12 months the debtor company would be unable to pay its debts.”

The effect of an assignment of loan relationship debt

Any “profit” or “loss” on the assignment of a debt by the original creditor will generally give rise to a taxable credit or debit.

A loss will arise to the original creditor where the purchaser buys the debt at a discount to face value. In this case, the original creditor will be entitled to a tax deduction for the amount of the discount.

There should not generally be any tax implications for the debtor however provided the debt remains outstanding in full so that there is no release or writing down of the debt in the debtor's accounts.

If, however, an impaired debt is acquired at a discount by a company that is (or immediately after the acquisition becomes) connected with the debtor, the debt is treated as released to the extent of the discount and this amount is treated as a taxable credit in the debtor’s hands. Care is therefore required where debt is acquired by a connected company.

The UK tax legislation is not intended to present any barriers to debt restructuring but it does contain a number of potential traps and pitfalls. Before releasing or assigning any debt it is therefore essential to assess the tax implications for both the debtor and creditor at an early stage so as to prevent any unexpected surprises (and costs) and allow for changes to be made to the structure if necessary.

Haydn is a tax partner who provides tax advice and support across all the commercial practice areas. He is a dual-qualified solicitor and chartered accountant with over 20 years' experience advising on corporate, employment and property tax issues.

If you would like to know more about taxation arising on any restructuring of corporate debt, or have any other tax-related queries, contact our tax solicitors .

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• Tax Support for Professionals

Debt releases between companies with common shareholders

Chris Holmes in our London Tax Group and David Hicks of Charles Russell Speechlys authored “ Debt releases between companies with common shareholders ”, published by Tax Journal on 5 February 2021.

The current trading environment is causing many companies to consider releasing wholly or partly recoverable inter-company debts. When considering such debt releases, the corporation tax consequences are often considered first. What is sometimes overlooked is the fact that a debt between companies with common shareholders is usually a distribution to the shareholder; and it is this fact that may deter directors from proceeding with such debt releases. For such debts to be lawfully waived, reserves at least equal to the net book value of the debt are required, but it is the market value of the debt released upon which the shareholder’s tax is calculated. Releasing an irrecoverable loan may therefore mathematically not be taxable, as it has no or little value.

The article includes sections on:

• What is a distribution and why does it matter?
• Can a waiver of a loan be a distribution?
• Can a waiver of a loan between companies with common shareholder(s) be a distribution?  
• Common corporate shareholders 
• Value of distribution
• Other tax issues to consider.

We trust that you will find the article informative and interesting.

For more information, or for assistance, please contact Chris Holmes .

Read the article

Debt restructuring: International tax considerations

United Kingdom |  Publication |  July 2020

Introduction

1. sale of distressed debt, 2. debt-to-equity swaps, 3. debt waivers or modifications, concluding remarks.

The increasingly unpredictable economic landscape has created uncertainty and distress for businesses across a broad range of sectors and markets. Borrowers have been working to stabilize their businesses and ensure they have the liquidity to continue to trade through these difficult times. Lenders have been working to assist and support their borrowers by providing amendments and waivers under existing facilities as well as new money (where the circumstances permit).

But what happens if things don’t go to plan?

We know from past experience that borrowers and lenders have a number of debt restructuring scenarios that they commonly consider: from partial waivers to debt-to-equity swaps; from conditional waivers to the sale of distressed debt. But especially in a cross-border context, specific local tax consequences can significantly impact the choice between one scenario and another.

Norton Rose Fulbright has performed research across selected jurisdictions (i.e. the US, Australia, Canada, South Africa, France, the UK, Germany, Luxembourg and the Netherlands) on various debt restructuring scenarios and the local tax impact on debtors and creditors. This research has provided us with insight into various pitfalls that might occur from international debt restructurings.

This note discusses three commonly used debt restructuring scenarios:

• Sale of distressed debt
• Debt-to-equity swaps
• Debt waivers.

The goal is to flag key tax items across selected jurisdictions for each scenario, because we know from experience that, although certain international trends can be seen, any international debt restructuring requires careful consideration of the relevant local tax regimes.

The sale of distressed debt is a mechanism for a creditor to reduce their balance sheet exposure to debts which may currently be non-performing or have a significant risk of future default. In such circumstances, the debt would be sold at a discount to face value in view of the distressed financial circumstances of the debtor.

Certain private equity and other investment funds are known to have an appetite for the purchase of distressed debt on secondary markets (which may come in the form of an individual loan or a large portfolio) at a reduced price in order to realize a profit by either:

• In the case of a liquid market, rapidly selling on the debt
• Negotiating a financial restructuring of the company and/or awaiting the financial recovery of the debtor and consequently the future repayment of the debt.

As well as sales to unconnected parties, it may also be that the parties want to arrange a disposal to a connected party. This may occur, for example, where a debtor wants to acquire a debt into a group to remove the controls placed on it by the third-party creditor.

The sale of distressed debt is achieved by way of assignment or novation, depending on the terms of the debt. Consent of the debtor to a sale may be required. Individual debt sales are usually carried out on standardized documents, whereas portfolio sales are more likely to be negotiated on a bespoke basis. Alternatively, the creditor may sub-participate its interest in the loan, in which case it remains the lender of record but transfers the credit risk of the debtor to the participant. This may not result in the distressed loan coming off its balance sheet.

Key tax considerations

The selling creditor will want to ensure that they are able to claim relief for any loss they have incurred with respect to the debt. A buyer will want to ensure that their base cost in the loan is the price paid; that they do not suffer any immediate tax charge and that there are no transfer taxes that arise as a result.

The debtor will want to ensure that there are no adverse tax charges arising for them in relation to the sale and that the sale does not adversely impact on the deductibility of interest payments going forward. It will also be important for the parties to consider the impact on the withholding tax treatment of interest payments and the allocation of risk under the loan documents. A change in lender may mean that interest can no longer be paid gross or new treaty applications are required.

Both parties will want to ensure there is no tax charge for the creditor.

Research findings

Below we will summarize our key findings for the sale of distressed debt, where we distinguish between general international tax trends (i.e. how do the majority of the jurisdictions treat the sale of distressed debt) and specific tax issues (i.e. which jurisdictions take a different approach than others and therefore may need further consideration if a local tax payer is involved in the sale of distressed debt):

General trends

• The selling creditor’s position upon a sale is largely consistent across the jurisdictions, with a creditor realizing a tax deductible loss upon the sale of the debt at a discount. This loss typically reflects the difference between the carrying value of the loan and the sale proceeds, assuming that the sale is on arm’s length terms. There may be no tax loss where the selling creditor and buying creditor are connected.
• The transfer of a creditor’s right to a debt to another entity does not generally affect the corporate income tax position of the debtor (whose obligation to repay is generally unaffected by the sale). Some jurisdictions impose a tax charge on the debtor where the buying creditor is connected with the debtor.
• The buying creditor will generally not suffer an immediate tax charge and its base cost in the debt will be the price it paid (again assuming that the acquisition is on arm’s length terms).
• The transfer of a debt should not give rise to transfer taxes unless the debt has equity like characteristics such as results-dependent interest or is convertible into equity.

Specific issues

In circumstances where the buying creditor and debtor are related parties, the debtor may be subject to tax on the difference between the carrying value of the debt and the amount the incoming creditor paid for the acquisition.

The general rule which states that the debtor’s tax obligations will be unaffected on the sale of a debt will apply provided that the debtor is notified of the change in creditor.

If the sale is set up on beneficial terms for the incoming creditor, a taxable gain may be charged on any hidden capital contribution or distribution which that creditor receives.

• The Netherlands

Stringent anti-avoidance provisions are in place to ensure that a creditor cannot avoid Dutch tax liability from an upward valuation of a loan which has previously been written-down (where the parties are affiliates).

If a debt is sold to an incoming creditor that meets certain interest tests in the debtor for less than 80 percent of the principal amount of the loan, then a taxable credit may arise in the debtor.

A debt-to-equity swap, substitution or restructuring is a capital reorganization of a company in which a creditor (usually a bank, possibly together with other banks, bondholders or creditors) converts indebtedness owed to it by a company into one or more classes of that company’s share capital.

There is no preordained structure for a debt-to-equity swap. Much depends on the existing debt and capital profile of the company and the intended result. The main commercial issues to be settled between the company (effectively representing its shareholders) and its principal bank (and other creditors) are:

• How much debt is to be substituted by share capital?
• What proportion of the total equity should the shares issued to the creditor comprise?
• Which class of shares should be issued to the creditor? Are there any restrictions on the type of shares issued?
• Should the creditor accept any restriction on its ability to dispose of the shares issued to it?

To a large degree, the negotiating position of the bank will depend on whether or not the reconstruction involves new money from other investors being injected by way of share capital. Institutional investors considering putting new money into the company will usually drive a harder bargain than the company itself.

The creditor will be interested in:

• Tax relief for the debt that is capitalized.
• The tax base cost in the new shares issued on the debt capitalization.
• Tax charges on the issuing company on the debt capitalization.

From a debtor perspective, the key aspects are:

• Will release of the debt result in taxable income?
• Will the issuance of new shares cause a cancellation of losses?

Below we will summarize our key findings for debt-to-equity swaps, where we distinguish between general international tax trends (i.e. how do the majority of the jurisdictions treat a debt-to-equity swap) and specific tax issues (i.e. what jurisdictions take a different approach than others and therefore may need further consideration if a local tax payer is involved in a debt-to-equity swap):

• Creditors involved in a debt-to-equity swap are generally able to convert their debt into equity in a tax neutral transaction, where the tax book value of the shares received equals the tax book value of the converted debt.
• The position may be different if the creditor is a related party of the debtor. A number of jurisdictions have legislation that prevents a creditor from depreciating a debt and subsequently converting the debt into equity in a tax neutral way.
• A debtor that issues new shares to the creditor as part of the debt-to-equity swap may suffer a reduction of its tax losses. If the release of the debt is considered to give rise to taxable income, this may impact existing tax losses. Certain countries apply specific debt forgiveness rules that prevent taxation at the debtor level in case the release of the debt exceeds available tax losses.
• In addition, the issue of new shares to a creditor outside the debtor’s group may result in a (substantial) change of shareholder and thus trigger tax loss cancellation rules in a number of jurisdictions, or a change of ownership for tax purposes.

When a German debtor is relieved from its debt (including as a result of a debt-to-equity swap), the cancellation of the debt will trigger a taxable gain to the extent the debt was depreciated by the creditor. This is the reason that straight-forward debt-to-equity swaps are very rare in Germany.

The UK has prescriptive rules which govern the circumstances in which debt-to-equity swaps will give rise to relief for the creditor and avoid a taxable credit for the debtor. For example, the release must be in consideration for ordinary share capital which rules out use of fixed rate preference shares. Care must be taken to ensure that the relevant conditions are met.

A debt-to-equity swap is generally a tax neutral event for debtors, where both the release of the debt and issuance of shares are accounted for at nominal value rather than market value.

A debt waiver, debt cancellation or debt forgiveness is a transaction in which a creditor (usually a shareholder but also third-party creditors such as banks, bondholders or suppliers) voluntarily relinquishes its right (in whole or in part) to payment under a debt instrument. The waiver serves the purpose of relieving the debtor from a financial obligation; it is a common element in restructuring scenarios, including UK Schemes of Arrangement and US “Chapter 11” procedures (and is expected to form a part of WHOA schemes). The debt waiver is often part of a package of relief used in an effort to ensure the survival and prospects of the debtor.

There is no set structure for a debt waiver. In principle, it may be implemented by a simple and short waiver declaration.

Debt modification

As an alternative to a waiver, the terms of the debt may be amended so any repayment is contingent on certain conditions being satisfied. However, agreeing the conditions for payment may be a complex task as the agreement needs to anticipate under which circumstances the company is required to pay the debt.

As a part of restructuring negotiations, creditors may require some form of reward if the restructuring proves successful. These benefits can take a number of forms, including increased pricing, a cash sweep, exit fees and/or equity-like debt instruments. For this purpose, the debt can be (partially) waived, amended and/or swapped for a new instrument at the time of the restructuring. Payment of the debt could be conditional on the financial situation of the debtor improving such that its debt capacity allows for a (partial) servicing of the debt.

Waiver and conditional reinstatement

In Germany, creditors can agree to a waiver of debt on the basis that such debt will be reinstated if certain conditions are satisfied, e.g. if and to the extent the debtor recovers financially.

Similar to the modification of debt, the agreement on the terms of the reinstatement of the debt can be rather complex. From a tax and accounting perspective, such transaction is treated as a full waiver and the creation of new debt once the reinstatement takes place. Other jurisdictions outside Germany do not treat a waiver with a conditional reinstatement as a waiver of debt, but rather as an amendment to the payment terms of the instrument.

Main commercial issues

The main commercial issues to be settled between the company and its creditors are:

• How much of the debt is to be forgiven? Will all creditors participate in the measure equally (the expectation being that creditors in the same class would be treated equally)? Should shareholder financing take the hardest hit (the expectation being that shareholder debt is treated akin to equity and so should be released before third-party lenders are expected to release their debt)?
• Should the waiver be in combination with other measures (e.g. debt-to-equity conversion)? Should the measures be linked (e.g. possibility to convert into equity upon certain triggers)?
• Under which circumstances will the debt be payable? Can certain creditors – secured vs. unsecured or long-term vs. short-term – take priority?

To a large degree, the negotiating position will depend on the granularity of the creditor group. The more the company needs to rely on the buy-in of only a few creditors, the more bargaining power they will have when it comes to the terms of the reinstatement.

• Will the release of the debt result in a tax relief and will the payment of the debt result in taxable income?
• In case of any changes to the terms of the debt, is it free to structure the conditions for payment? In how far can it mitigate abuse by the debtor?
• Will the release of the debt result in taxable income?
• In case of amendments, will the payment of the debt result in a tax relief?
• Is a new debt created?

Below we will summarize our key findings for debt waivers and modifications, where we distinguish between general international tax trends (i.e. how do the majority of the jurisdictions treat a waiver and reinstatement of debt) and specific tax issues (i.e. what jurisdictions take a different approach than others and therefore may need further consideration if a local tax payer is involved in a debt waiver or modification):

• Creditors involved in a debt waiver transaction are generally able to obtain a tax relief for the debt forgiven. This treatment is mirrored at the time the condition is fulfilled and the debt is reinstated: the debtor realizes a taxable gain.
• For the debtor, the waiver is generally taxed since it is released of a repayment obligation at nominal value.
• In Germany, a waiver with a conditional reinstatement typically results in a tax relief for the debt recognized at the time of reinstatement. Of course, in other jurisdictions where the waiver is not recognized as such, neither the waiver/ modification of payment terms nor the reinstatement would be taxed.
• If the loan is cross-border, a new loan may be created, so that new double tax treaty clearances are required.

The waiver of shareholder debt may be treated as a (hidden) contribution in kind, if and to the extent the debt is valuable. The conditional debt waiver is also used as a loss-refresher to carry a loss beyond a change-of-control which would typically cause a forfeiture of tax losses.

A conditional debt waiver is accepted as a waiver and potential reinstatement if, at the time of the waiver, it is unlikely that the debtor becomes solvent again. Given that many restructuring/ insolvency regimes work on the assumption of a successful turnaround, the conditional waiver may often not be recognized.

Where a loan is amended so that repayment is made to be contingent or conditional then care will need to be had that this does not cause the loan to be treated as equity.

The current economic environment may create the need for multinationals to reconsider their debt positions. At the same time, distressed debt and other investment funds (such as private equity investors) are actively looking for investment opportunities. But especially in a cross-border context, each debt restructuring scenario is impacted by specific local tax consequences.

In this note we have summarized some general trends and specific tax issues that could arise from a sale and purchase of a distressed debt, debt-to-equity swaps and debt waivers. One of the key take-aways from our international research is that although certain international trends can be seen, any international debt restructuring requires careful consideration of the applicable local tax regimes.

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Avoiding the trap

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Mandipa Soni provides practical guidance on avoiding common pitfalls when dealing with debt restructuring

What is the issue?

When undertaking a corporate transaction, debt restructuring can be a complex area with many pitfalls.

What does it mean to me?

Given the impact financing matters can have on a corporate tax profile, getting it wrong can be costly.

What can I take away?

Anyone advising on the restructuring of corporate debt should understand the full history of how the debt arose, and give thought to tax issues that might arise outside the loan relationship rules including distributions, withholding taxes, anti-hybrids and the impact on the corporate interest restriction, among other considerations.

For most tax advisers, when undertaking a corporate transaction, debt restructuring can be a complex area with many pitfalls. Really understanding the transaction and its constituent parts is key, and typically will involve terminology such as debt elimination, refinancing or buy-ins, novations and distressed debt, all of which come with their own tax implications. Given the impact financing matters can have on a corporate tax profile, getting it wrong can be costly.

More often than not, the decision to restructure debt is driven by the commercial reality facing the company or group. Some of the reasons for reorganising debt include:

• To facilitate repatriation of cash through the structure and to shareholders;
• Obtain better terms of lending from third party lenders (which will depend on the level of debt in a group);
• Improve or restore liquidity (e.g. where a company is in financial distress); or
• Enhance the value/credit worthiness of group debtor companies.

As a result, tax advisers play an important role when undertaking any kind of debt restructuring highlighting important tax issues for both the lender (creditor) and the borrower (debtor).

The loan relationships legislation in CTA 2009 provides a framework for the taxation of UK corporate debt. The default position is that companies are required to bring debits and credits into account for corporation tax purposes that are recognised in the P&L. However, there are many exceptions to this basic rule, and this article seeks to uncover some of the key issues in dealing with debt on a group reorganisation, and addresses some of the author’s views on best practice.

What is a loan relationship?

Before we start, a quick refresher on the key term – ‘loan relationship’.

Per s302 CTA 2009, a loan relationship is a money debt, which arises from a transaction for the lending (or borrowing) of money.

As defined in s303(1) CTA 2009, a money debt is any debt that falls, or has fallen, to be settled by the:

• Payment of money;
• Transfer of a right to settlement under a debt which is itself a money debt; or
• Issue or transfer of shares in a company.

The definition of a money debt also includes a transaction that has at any time been a debt that at the option of either party falls to be settled in any of the above ways.

The basic definition of a loan relationship is extended in s303(3), to include money debts arising where an instrument is issued representing security for the debt, or the rights of a creditor in respect of the debt.

The question as to what constitutes a ‘debt’ for these purposes, presents the first challenge here. Ultimately, this becomes a question of the legal substance of the transaction, i.e. the existence of a legal obligation to transfer cash, goods or services to another party. If the creditor has no legal right to the consideration, there can be no debt.

Debt restructuring options

The following sections consider some of the options available in relation to debt reorganisation, and the issues that might arise.

Formal release of debt

A formal release is a method of eliminating debt in a structure. A release of debt would typically result in a P&L debit and credit for the creditor and debtor companies, respectively. In the absence of specific tax legislation to the contrary, for UK tax purposes, it can be expected that credits arising from a formal release would be taxable, and debits tax-deductible.

However, the legislation provides for a different tax treatment, such that any credit would be non-taxable, and any debit non-deductible, providing certain conditions are met and the creditor and debtor companies are ‘connected’ under the loan relationship provisions. Companies are connected for these purposes if one company controls the other, or both are under the common control of a third company. Control is defined in s472 CTA 2009 and requires the power of a person to secure that the affairs of a company are conducted in accordance with his wishes.

There can be complications when seeking to apply the loan relationship provisions to the release of connected company debt.

The debt in question must fall within the loan relationship provisions. That is, it must have arisen through a transaction for the lending of money. The definition of a loan relationship is extended in s479 CTA 2009 to include ‘relevant non-lending relationships’ which are deemed to be loan relationships for tax purposes. However, the scope of the debits and credits to be brought into account under these rules is restricted to specific items such as impairment losses and foreign exchange.

A potential solution may be available under the extended definition of a loan relationship under s303(3), which allows a money debt (that has not arisen from the lending of money) to be deemed a loan relationship by the issue of a debt instrument, such as a company security or promissory note. Whilst any legal document can be an ‘instrument’, it is necessary to ensure that the purpose test is satisfied, i.e. that the instrument is issued for the purpose of representing:

a) Security for the debt; or b) The rights of a creditor in respect of the debt.

Furthermore, the word ‘issued’ is not defined, but requires a unilateral act by the issuer. That is, it is unlikely to apply to a bilateral agreement entered into jointly by both parties.

Care must be taken where a promissory note has been issued in respect of a debt which includes accrued interest. Whilst the release of interest does not, in itself, constitute a payment of interest for UK withholding tax purposes, there is a risk that the issue of a security under s303(3) over accrued interest could give rise to a withholding tax obligation under the funding bond rules. Per s413(2) CTA 2009, the issue of a funding bond creates a payment of interest equal to the market value of the security that requires the issuer to tender to HMRC, bonds to the basic rate of tax on the deemed interest in discharge of the withholding tax liability (s939(2) ITA 2007). Although, if the interest is subsequently released by the creditor, there is an argument that the funding bonds become worthless.

In addition to withholding taxes, there may be other tax costs associated with the release of debt in an international group. For example, a cross-border release could result in a tax mismatch where the release debit is tax-deductible in one country, and the release credit non-taxable in another. The UK’s anti-hybrids legislation seeks to obtain tax symmetry in situations of tax mismatch, and may result in the release credit being taxable in the UK. Clearly, it has become critical to understand the tax treatment in all territories in order to determine the UK tax position, and access to comprehensive international tax advice is necessary when advising in this area.

In addition to tax, there are also non-tax issues to consider. The tax analysis relies on the accounting treatment, and therefore clarity is required as to how the debt, and any release debits and credits may be accounted for. Furthermore, the legal considerations are critical and it will be important to ensure these are understood early in the process, ensuring Company law and legal agreements are not breached. Specific matters may include drafting documentation and modelling distributable reserves positions, which can head off potential dividend blocks in the structure that may prevent the commercial purpose of the transaction succeeding.

One common Company law matter where advice may need to be obtained is where one is releasing debt where the money has been lent by a subsidiary to a parent company, or between two sister companies, as the release may be considered an unlawful distribution under Company Law if the lender has insufficient distributable reserves at the point the balance is released ( Aveling Barford v Perion Ltd [1989]).

Debt buy-ins

Care must be taken when a restructuring or refinancing involves impaired debt (i.e. one that is unlikely to be paid or recovered in full), as provisions exist which can result in a taxable profit where the relevant loan asset is impaired. In these cases, it is important to understand the detailed history of a particular balance, including how it arose, and how it has been measured.

Broadly, the general principle in s358 CTA 2009 that prevents a release credit being taxable for a connected company relationship can be overridden in one of the following cases:

i) A connected creditor company acquires an ‘impaired debt’ to which the debtor is party (s361 CTA 2009); or ii) Two unconnected creditor and debtor companies which are party to an impaired debt, become connected (s362 CTA 2009).

In either of the above situations, the tax treatment is such that there is deemed to be a release of the impaired portion of the debt, giving rise to a taxable credit in the debtor company (effectively overriding s358 CTA 2009).

A taxable credit might also arise on the release of ‘relevant rights’. These are broadly rights that would have been taxable as a ‘deemed release’ (absent exclusions) prior to the introduction of F(No.2)A 2015, which introduced two new corporate rescue exceptions to enable companies in financial difficulty to be refinanced without a tax charge arising on impaired debt. There isn’t enough space on the page to also go into detail on the nuances for financial distress situations in detail (and the topic is deserving of an article in its own right), but broadly, these reliefs ensure that where the debt buy-in has been undertaken as part of a genuine corporate rescue, s358 CTA 2009 should still apply and prevent release credits being brought into account to tax.

Debt for equity

An alternative method for eliminating debt, would be to release debt in consideration for ordinary shares of the creditor company.

In this case, the general rule where debt is swapped for equity in an unconnected debtor, is that the debtor is not required to bring a release credit into account where the debtor company is using an amortised cost basis of accounting for a liability, and the conditions of s322(4) CTA 2009 are met:

‘…the release is: a) In consideration of shares forming part of the ordinary share capital of the debtor company; or b) In consideration of any entitlement to such shares.’

Ordinary share capital is defined for these purposes in s1119 CTA 2010, as ‘all the company’s share capital (however described), other than the capital the holders of which have a right to a dividend at a fixed rate but have no other right to share in the company’s profits’.

However, it is worth noting that in their manuals (CFM33202), HMRC draw attention to the potential misuse of the exemption within s322(4) – ‘Whether or not a debt has been released ‘ in consideration for shares’ will depend on whether on a realistic view of the transaction, s322(4) CTA 2009, construed purposively, can be said to apply to it. ’ HMRC also acknowledge, however, that ‘ In the majority of cases, there will be no doubt that a debt/equity swap that forms part of a commercial debt restructuring, undertaken at arm’s length transaction, will fall within the exemption in CTA09/S322(4). ’

Whilst there are situations where the s322 CTA 2009 provisions might not apply (for example, where an amortised cost basis is not adopted), it is possible that the release credit falls outside of the scope to tax. An example might be where the creditor company agrees to subscribe for additional shares in the debtor company, and uses the subscription proceeds to repay the original debt. In this case, the cash need not transfer hands. This relies on the outcomes from the Re Harmony and Montague Tin and Copper Mining Co Ltd (Spargo) [1873] case which established the principle that a debt obligation owing from one company to another could be offset by the second company’s obligation to pay an equal amount to the first. Care, of course, should be taken to ensure the obligations have equal value.

Transfers of loan relationships between group companies

It may be the case that the debt may be transferred, by novation or otherwise, to other companies in the same group.

In the UK, the Group Continuity rules seek to ensure that tax neutral treatment applies where a transferee company replaces the transferor as a party to a loan relationship. In order to apply these rules, both companies must be within the charge to UK corporation tax and within the same capital gains group (s340 CTA 2009).

The impact of the Group Continuity provisions is that one company directly (or indirectly) replaces the other as a party to a loan relationship and as such, any debits or credits arising from the transfer are ignored. However other debits and credits (such as interest) are treated normally, and arise to the transferor or transferee company according to their periods of ownership.

However, if the transferee company leaves the group within six years of the transfer while still party to the loan relationship, a degrouping charge would arise to bring into account the taxable profits held-over at the time of the transfer of the loan relationship (s344–346 CTA 2009).

In effecting an intragroup transfer of debt, consideration should be given to any relevant legalities. For example, the novation of a liability can only be undertaken with the consent of all parties involved, and therefore, typically requires a tripartite agreement (or similar).

Final thoughts

My key tips and practical considerations for anyone advising on the restructuring of corporate debt would be:

• Understand the full history of how the debt arose – has the debt been previously impaired, or arisen from a previous intra-group transaction?
• Whilst tax is important, the best solution is obtained by being involved in the whole project and adopting a holistic approach, giving consideration to the accounting and legal implications as well. It is worthwhile having a step plan to ensure that you track the impact on reserves and identify the specific order in which steps should be undertaken.
• Use your international network – in today’s tax world, a complete answer will not be obtained by considering the UK in isolation. For all cross-border situations, ensure that you understand the tax treatment for any overseas territories.
• Give thought to tax issues that might arise outside the loan relationship rules including distributions, withholding taxes, anti-hybrids and the impact on the corporate interest restriction.

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Debt Assignment: How They Work, Considerations and Benefits

Daniel Liberto is a journalist with over 10 years of experience working with publications such as the Financial Times, The Independent, and Investors Chronicle.

Charlene Rhinehart is a CPA , CFE, chair of an Illinois CPA Society committee, and has a degree in accounting and finance from DePaul University.

Katrina Ávila Munichiello is an experienced editor, writer, fact-checker, and proofreader with more than fourteen years of experience working with print and online publications.

Investopedia / Ryan Oakley

What Is Debt Assignment?

The term debt assignment refers to a transfer of debt , and all the associated rights and obligations, from a creditor to a third party. The assignment is a legal transfer to the other party, who then becomes the owner of the debt. In most cases, a debt assignment is issued to a debt collector who then assumes responsibility to collect the debt.

Key Takeaways

• Debt assignment is a transfer of debt, and all the associated rights and obligations, from a creditor to a third party (often a debt collector).
• The company assigning the debt may do so to improve its liquidity and/or to reduce its risk exposure.
• The debtor must be notified when a debt is assigned so they know who to make payments to and where to send them.
• Third-party debt collectors are subject to the Fair Debt Collection Practices Act (FDCPA), a federal law overseen by the Federal Trade Commission (FTC).

How Debt Assignments Work

When a creditor lends an individual or business money, it does so with the confidence that the capital it lends out—as well as the interest payments charged for the privilege—is repaid in a timely fashion. The lender , or the extender of credit , will wait to recoup all the money owed according to the conditions and timeframe laid out in the contract.

In certain circumstances, the lender may decide it no longer wants to be responsible for servicing the loan and opt to sell the debt to a third party instead. Should that happen, a Notice of Assignment (NOA) is sent out to the debtor , the recipient of the loan, informing them that somebody else is now responsible for collecting any outstanding amount. This is referred to as a debt assignment.

The debtor must be notified when a debt is assigned to a third party so that they know who to make payments to and where to send them. If the debtor sends payments to the old creditor after the debt has been assigned, it is likely that the payments will not be accepted. This could cause the debtor to unintentionally default.

When a debtor receives such a notice, it's also generally a good idea for them to verify that the new creditor has recorded the correct total balance and monthly payment for the debt owed. In some cases, the new owner of the debt might even want to propose changes to the original terms of the loan. Should this path be pursued, the creditor is obligated to immediately notify the debtor and give them adequate time to respond.

The debtor still maintains the same legal rights and protections held with the original creditor after a debt assignment.

Special Considerations

Third-party debt collectors are subject to the Fair Debt Collection Practices Act (FDCPA). The FDCPA, a federal law overseen by the Federal Trade Commission (FTC), restricts the means and methods by which third-party debt collectors can contact debtors, the time of day they can make contact, and the number of times they are allowed to call debtors.

If the FDCPA is violated, a debtor may be able to file suit against the debt collection company and the individual debt collector for damages and attorney fees within one year. The terms of the FDCPA are available for review on the FTC's website .

Benefits of Debt Assignment

There are several reasons why a creditor may decide to assign its debt to someone else. This option is often exercised to improve liquidity  and/or to reduce risk exposure. A lender may be urgently in need of a quick injection of capital. Alternatively, it might have accumulated lots of high-risk loans and be wary that many of them could default . In cases like these, creditors may be willing to get rid of them swiftly for pennies on the dollar if it means improving their financial outlook and appeasing worried investors. At other times, the creditor may decide the debt is too old to waste its resources on collections, or selling or assigning it to a third party to pick up the collection activity. In these instances, a company would not assign their debt to a third party.

Criticism of Debt Assignment

The process of assigning debt has drawn a fair bit of criticism, especially over the past few decades. Debt buyers have been accused of engaging in all kinds of unethical practices to get paid, including issuing threats and regularly harassing debtors. In some cases, they have also been charged with chasing up debts that have already been settled.

Federal Trade Commission. " Fair Debt Collection Practices Act ." Accessed June 29, 2021.

Federal Trade Commission. " Debt Collection FAQs ." Accessed June 29, 2021.

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HMRC Reduces Its Overall Debt Balance, But New Debt Continues to Rise

Sushil Patel

Introduction

Following the accumulation of record levels of overdue debt as the result of the COVID-19 pandemic, Her Majesty's Revenue and Customs (HMRC) has successfully reduced the overdue debt balance to £39.4 billion (bn) as at December 2021, a reduction of £18.1 bn from the March 2021 year-end results that Kroll reported in November.

However, the underlying issue of “debt available for pursuit” continues to loom heavily on the horizon. In this article, we consider how HMRC could reduce the overdue debt balance in line with pre-COVID-19 levels (£13-16 bn), whether this is a realistic target, and what this means for you and your business.

Reduction in Overall Debt Balance

Within six months of the outbreak of COVID-19, the total debt balance soared to an all-time high of £69.5 bn. This was due to the introduction of government measures such as the automatic Value Added Tax (VAT) deferral scheme as well as an increased willingness from HMRC to support businesses that were impacted by the pandemic and looking to retain cash during a time of unprecedented uncertainty. HMRC’s collection scheme in relation to deferred VAT has clearly worked, however, there was a significant number of taxpayers that did not register for this scheme.

Since September 2020, the total debt balance has reduced in each quarter, now totalling £39.4 bn as of 31 December 2021, marking a 43% reduction over the 15 month period. In that time, VAT deferred through the government scheme has been repaid, with the final instalments due in February 2022. In addition, other Time-to-Pay (“TTP”) repayment plans agreed by HMRC over the COVID-19 period have continued to run their course and HMRC has gradually began to re-introduce debt collection activity.

Comparison to Pre-COVID

Despite the progress that HMRC has made with the collection of overdue debt, the December 2021 debt balance is still over double the level immediately preceding the pandemic and nearly three times higher than the eight-year average of £14.5bn leading up to March 2020. HMRC is likely to continue to be under pressure to reduce the debt balance as the UK continues its post-COVID-19 recovery, especially given the recent cost of living crisis and the ongoing calls for the UK government to support families struggling with the impacts of high inflation and soaring energy prices 

Debt Available for Pursuit

Of greater concern, is that whilst the overall debt balance has fallen, the “debt available for pursuit” has in fact increased. The graph below highlights how the composition of HMRC’s debt balance has fluctuated over the last 18 months. Each category of debt arrears is defined as follows:

• Managed debt – mainly arrears incorporated into TTP arrangements, but this also includes debts that have reached the end of HMRC's pursuit process
• Policy debt – Self Assessment and VAT charges deferred due to COVID-19 (including managed debt and debt available for pursuit)
• Debt available for pursuit – debt available to be pursued via regular debt management

Since September 2020, whilst policy debt has steadily decreased, managed debt has continued to increase, peaking at £4.6bn in September 2021 before reducing to £4.1bn at December 2021, this being almost double pre-COVID-19 levels (£2.3bn). After an initial decrease in debt available for pursuit from a peak of £31.2bn in June 2020 to £26.6bn in December 2020, this category of debt has shown a growing trend, rising by £5.9bn (22%) to £32.5bn in December 2021.

This is a clear sign that wider macroeconomic activities are continuing to pose a challenge to UK businesses and impact their ability to meet their ongoing tax liabilities. The new wave of financial and economic pressures, including supply chain disruption, rising interest costs, inflationary pressures and labor shortages, are likely resulting in further business pressures.

We anticipate that the debt collection and debt management teams within HMRC will continue to face significant challenges in collecting debt.

Future Outlook

HMRC will be under pressure to continue its momentum in reducing overdue debt balances back to pre-pandemic levels.

HMRC has a responsibility to act in the Treasury’s best interests to manage the levels of overdue debt whilst also ensuring enforcement action is taken against unviable businesses that could be trading to the detriment of UK taxpayers. There will undoubtedly be some compromise between stakeholders in the short term, as HMRC has demonstrated continued support to allow businesses time to recover from the impact of COVID-19. 

With policy and managed debt accounting for only £6.9 bn (17.5%) of the total debt balance in December 2021, the collection of debt deferred in agreement with HMRC directly as a result of COVID-19 is reaching its conclusion.

HMRC is likely to utilize the full range of available enforcement options in recovering the remaining debt balance and this could result in additional actions such as security charges, the requirement for security bonds, field force visits and possible winding-up action. There has already been an increase in debt collection activity from HMRC for the past six months, and with HMRC’s restored position as secondary preferential creditors in insolvency proceedings, there may be an increase in debt collection activities in the next quarter.

How Kroll Can Help

Kroll’s Tax Arrears Solutions  team can help you or your client negotiate a Time To Pay (TTP) arrangement with HMRC and manage other key stakeholders during this period, which is often a key component of a successful turnaround plan that preserves a company’s future and safeguards jobs. 

We use a hands-on approach to help clients facing financial uncertainties, working with management teams and their advisors to review working capital management and devise solutions to improve cash flow.

In 2021, our experts secured close to 30 TTP arrangements with a total debt value in excess of £18 million and safeguarding close to 3,000 jobs. Contact us today to find out how we can help you.

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Managing tax debt through the pandemic

Report – Value for money

Date: 17 Nov 2021

Topics: COVID-19 , Money and tax , Resilience , Risk and resilience , Tax

Departments: HM Revenue and Customs

Background to the report

As the UK’s tax authority, HM Revenue & Customs (HMRC) has played a pivotal role in providing financial support to taxpayers during the pandemic. As the economy went into lockdown, government deferred payments of Self Assessment Income Tax and VAT due between March and July 2020. HMRC paused most of its debt collection activity and set about creating new employment support schemes.

The wider economic impact of the pandemic, and HMRC’s decision to suspend most debt collection, has led to large increases in the amount of tax owed to HMRC. Tax debt peaked at £67 billion in August 2020, including deferred payments. This was far in excess of levels seen in the previous 10 years.

Scope of the report

This report considers how well HMRC has managed tax debt through the pandemic – in particular, whether it has adapted sufficiently to the changing nature and scale of that debt and the wider circumstances that affect taxpayers’ ability to repay tax. It considers whether HMRC has:

• adapted its management of tax debt quickly and responsively during the pandemic;
• understood the impact of the pandemic on taxpayers’ ability to pay tax debt; and
• the capacity and capability it needs to manage tax debt.

Report conclusions

At the onset of the first lockdown, HMRC acted quickly, pausing debt collection to reduce pressure on debtors and working to improve its understanding of how the pandemic was affecting taxpayers. It subsequently launched its Return to Collection campaign and made it easier for taxpayers to repay debt online. Early indications were encouraging, with taxpayers repaying debt faster than expected and stakeholders welcoming HMRC’s understanding tone. However, HMRC also forecasts that higher levels of tax debt will persist.

HMRC faces several years of managing the impact of the pandemic on tax debt and current staffing is unlikely to be enough to manage the increased workload. It made efficiencies before the pandemic but it did not improve overall levels of debt collection and it was writing off more debt. It estimates that adding staff and private sector capacity would have most success in increasing debt collection.

While some debtors have been able to repay tax debt quickly during the pandemic (helped by loans and support from other parts of government), there remains an unknown number of taxpayers who have been badly affected and will struggle to repay tax debt. HMRC must build on its initial work and better understand the resources it needs to manage the scale of the challenge it faces.

“HMRC faces several years of managing a far greater level of tax debt than it has seen in recent times, as a result of the COVID-19 pandemic. Some debtors have already been able to repay their tax debt quickly, but an unknown number of taxpayers have been badly affected and will struggle to do so. HMRC needs to significantly increase its capacity if it is to meet the changed scale and nature of the challenge.” Gareth Davies, the head of the NAO

• Report - Managing tax debt through the pandemic (.pdf — 588 KB)
• Sumary - Managing tax debt through the pandemic (.pdf — 113 KB)
• ePub - Managing tax debt through the pandemic (.epub — 2 MB)

Publication details

• ISBN: 9781786043955 [ Buy a hard copy of this report ]
• HC: 799, 2021-22

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That’s A Relief! Debts And CGT

Debt on a security, sale proceeds in instalments.

• if the loan notes ‘go bad’ potentially the deferred gains may still fall into charge if the loan notes were disposed of (unless gifted to charity – see HMRC’s Revenue Interpretation 23); and
• the deferred gains will usually not qualify for CGT entrepreneurs’ relief.

Property received in exchange for debt

Practical tip:.

• Where the sale of a company involves deferred consideration, the tax implications are complex: where the structure adopted aims to ensure that relief under TCGA 1992, s 48 might be available, it is vital not to create any debt instrument which might be deemed to be a debt on a security and also a QCB. Expert advice is therefore strongly recommended. 
• Where TCGA 1992, s 251(3) might apply, there are other tax issues which may be relevant, for example stamp duty land tax (or land and buildings transaction tax in Scotland) on the transfer of the property and, again, professional advice is recommended.
• It’s Party Time! – Tax And The Office Party
• Connected party debt: Some ‘dos’ and ‘don’ts’
• Tax Relief for Business Expenses --- Premises Maintenance and Repairs
• Using the New ‘Cash Basis’
• Employees working from home during Covid-19: Tax tips

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HMRC to introduce more controls over repayment agents

Published: 11 Jan 2023 Update History

In its response to the consultation Raising standards in tax advice: protecting customers claiming tax repayments , the government has said that it plans to:

• introduce legislation to render void assignments of income tax repayments (nominations of repayments to third parties will continue);
• require repayment agents to register as agents with HMRC;
• introduce new transparency requirements for agents in the HMRC Standard for Agents – a revised version has been published with the government’s response;
• explore mandatory pre-contractual disclosure forms and strengthening checks on repayment agents;
• undertake further work to strengthen the evidence that a claim has been made with a taxpayer’s consent before processing it; and
• improve the way in which taxpayers authorise their agent.

In ICAEW REP 71/22 , ICAEW supported prohibiting the use of assignments but expressed concern that the changes could completely close down the repayment agent market or effectively restrict it to higher value claims, rather than improve practices in that market and stamp out abuse.

If the repayment agent model closes down and HMRC does not promote claims by taxpayers and make it easier to claim, a significant amount of tax relief might go unclaimed. ICAEW’s Tax Faculty notes that the government response provides little in the way of reassurance that HMRC will promote the availability of reliefs and make them easier to claim.

Some of the proposed new requirements do raise possible concerns that the Tax Faculty will discuss with HMRC. These include ensuring that:

• the new transparency requirements in the HMRC Standard for Agents are satisfied by the ICAEW model engagement letters and that no new requirements would apply;
• the approach to the registration for repayment agents, which will be set out in early 2023, does not lead to additional registration requirements for existing agents; and
• that changes to the existing agent authorisation processes are introduced with care.

On that last point, HMRC has decided that it should remain possible to submit repayment claims without formal authority being in place. The response states that existing agent authorisation processes should be reviewed, and the processes need to provide greater confidence to HMRC that the taxpayer is aware of and has consented to the claim, especially where it includes a nomination to make the repayment to someone other than the taxpayer. Care is required to ensure this is delivered in an effective way.

• Greater control for taxpayers using repayment agents
• HMRC approach to working with agents

The Tax Faculty

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• Dealing with HMRC
• Paying HMRC

How to pay a debt to HMRC with a Time to Pay arrangement

Get help to make a Time to Pay arrangement if you are an individual or business who owes a debt to HMRC.

Debt can be owed to HMRC for a variety of reasons, the best payment solution is different for each individual and business.

HMRC takes its responsibility seriously to make sure that individuals and businesses who can pay, do so on time. We provide extra, bespoke support to those facing financial hardship or who have personal difficulties.

If you’re finding it difficult to make a tax payment you should ask us about affordable monthly payment options, called a Time to Pay arrangement. We’ll always try to work with you to negotiate time to pay what you owe based on your income and expenditure.

Time to Pay arrangements are based on the specific financial circumstances of whoever owes a debt, so there is no ‘standard’ Time to Pay arrangement. We look at what you can afford to pay and then use that to work out how much time you need to pay.

A Time to Pay arrangement can cover all outstanding amounts overdue, including penalties and interest. Check HMRC interest rates for late and early payments .

The arrangement is designed to be flexible and is not a fixed, formal contract. It can be amended over time, so it can be shortened if your earnings rise or if you receive a cash windfall (for example, an inheritance). It can also be lengthened if your essential expenses increase, or your income reduces.

Over 90% of our Time to Pay arrangements are completed successfully.

How we work out debt repayments

Individuals.

We’ll decide your ability to pay using an ‘income and expenditure assessment’ form. This looks at your income, disposable assets and expenditure to help us work out your disposable income. You can find more information about this in the ‘how we work out what you can afford to pay’ section.

HMRC typically expects you to pay no more than 50% of your disposable income. This may be higher if you have a very high disposable income. There’s no upper limit on the amount of time that someone can have to pay.

Business finances are often complex, so we’ll ask you to tell us what you think the business can afford to pay.

After we have looked at your proposal, we’ll ask you questions about it to make sure it’s affordable and pays off the debt as quickly as possible.

The length of the arrangement will depend on:

• how much your business owes
• the business’ financial circumstances

The arrangement will be reviewed regularly and can be adjusted over time.

How to contact HMRC to discuss a Time to Pay arrangement

If you cannot pay your tax bill and need help you should contact HMRC as soon as possible.

For Self Assessment bills, you may be able to set up a payment plan online . This will let you pay your Self Assessment tax bill in instalments without contacting HMRC.

You can set up a payment plan to spread the cost of your latest Self Assessment bill online without calling us if:

• you owe £30,000 or less
• you do not have any other payment plans or debts with HMRC
• your tax returns are up to date
• it’s less than 60 days after the payment deadline

What to expect during a call

When you phone us we’ll ask you some questions, so make sure you have the following information when you call.

We may ask you:

• the reference number relating to the bill that you want to discuss
• details of the amount of tax that you cannot pay, covering all debts outstanding to HMRC
• why you’re not able to pay, and what your current financial circumstances are — outlined in the ‘how we work out what you can afford to pay’ section
• what you have done to try to pay your bill on time and in full
• about your current financial position (including income and expenditure, savings, investments and other assets)
• how you expect your finances to change in future
• questions to check if a Time to Pay arrangement would be the best payment solution
• for your bank account details, so you can set up a Direct Debit for your arrangement
• for the reference number relating to the bill that you want to discuss
• about any other debts the business owes HMRC
• about any tax repayments owed to the business
• for information about the business’ financial position — including how you expect the business’ finances to change in the future
• what efforts have been made to raise the funds against the business’ debt
• what has been done to try to pay the tax bill
• what the business has done or is doing to get its tax affairs back on track and to afford repayments
• for the business’ bank account details, so that a Direct Debit can be set up (the caller will need the authority to set up a Direct Debit on that account)

How we work out what you can afford to pay

We’ll use an ‘income and expenditure assessment’ form to record details of how much money you receive and spend, we’ll ask you:

• for your personal details (including your marital status and if you have any dependants)
• for your employment details (including your VAT registration number if you’re VAT-registered and your employer’s PAYE reference number if you’re an employee)
• if you own or rent your home and the cost of your mortgage or rent
• for details of your household’s average monthly income (including any rental income and any benefits you receive)
• for details of any assets you hold (such as the value of all of your property, if you own any motor vehicles and how much you paid for them and when)
• for information about any savings and investments you have (including saving certificates, Premium Bonds, Individual Savings Accounts and stocks and shares)
• how much you spend each month on household bills (including gas, electricity, water and Council Tax payments) and commuting, petrol, food, clothing and any television packages you might have
• for details of any other debt you have (including loans, hire purchase and credit cards)
• for information about any creditors you may owe money to (including debt that’s outstanding to them and the payments you make)
• how you plan to pay off your tax debt

If you have discussed what you can afford with an independent debt adviser (such as Citizens Advice) we’ll accept their income and expenditure figures if they are shown on their Standard Financial Statement. You should send the completed statement to the HMRC address shown on the latest letter we have sent you about your debt. Make sure the statement includes your:

• National Insurance number
• Self Assessment Unique Taxpayer Reference (if you have one)

Based on the information you give, we’ll work out your monthly disposable income. This is your monthly surplus income after deducting your monthly spending.

Usually, we’d expect 50% of your disposable income to be paid into your Time to Pay arrangement. We expect you to pay 50% rather than 100% because we want:

• your arrangement to be sustainable
• for you to be able to manage any unexpected changes in expenditure

You may wish to pay more than 50% to reduce the amount of interest you pay.

If you have a high disposable income but still need more time to pay, we’ll work with you to agree a level of payment that balances clearing the debt quickly with your reasonable monthly expenses. This may mean that you pay more than 50% of your disposable income.

If your income and expenditure information shows that you do not have enough disposable income, we’ll pause our collection activity until your circumstances change.

The length of the arrangement will depend upon how much you owe. There’s no upper limit on the length of an arrangement.

Your time to pay will be based on the information you have shared with us. We’ll make sure that your monthly payment reflects what you can afford to pay so that it’s sustainable over the length of the agreement. To help us support you in doing this:

• be open and honest during the payment plan discussion
• be ready to explain unusual or large items of expenditure
• provide all the information we ask for

We’ll usually accept what you tell us without asking for more details, but we may need more detail or evidence if your debt is large or complex.

We’ll review the information you have given us in your phone call.

We may ask questions about your proposal, to make sure it:

• is affordable
• pays off the debt as quickly as possible

The length of the arrangement will depend upon how much your business owes and its financial circumstances. It will be reviewed regularly and can be adjusted over time.

The arrangement can either be:

• shortened if the business’ financial position improves
• lengthened if the business’ financial position worsens but remains in a position to recover

How assets are treated when we agree a Time to Pay arrangement

If you have the means to pay your HMRC liabilities by realising assets (for example, savings, shares, or a second home) then we’ll discuss this with you.

If you have assets that both you and HMRC agree can be realised (including equity in a property), then we expect you to do so to reduce the debt as much as possible before we agree an arrangement.

We’ll not ask you to sell your family home. We may consider taking a charge on your home to secure the debt payable to HMRC if:

• it’s not possible to agree a Time to Pay arrangement with you
• you’re not able to pay by any other means

We’ll not expect you to access pension funds early to pay your debt. If you receive a pension this will be taken into account as part of your income and expenditure position.

If your business can pay its HMRC liabilities by releasing assets, then we will discuss this with you. Assets can include:

• vehicles or shares
• directors putting personal funds into the business
• business lending
• extending credit lines

If we agree with you that there are assets your business can release (including equity in a business property) then we would expect them to be used to reduce the debt as much as possible before we agree a Time to Pay arrangement.

Debts that can be included in a Time to Pay arrangement

Any tax, duty, penalties or surcharges that you cannot afford to pay can be included.

Interest charged on Time to Pay arrangements

Interest accrues from the due date to the end of the Time to Pay arrangement.

The interest payable will be included in overall debt covered by the arrangement.

You can find out information about interest payable on tax debts and charges in HMRC interest rates for late and early payments .

After a Time to Pay arrangement has been agreed

If payment instalments are made on time.

No further action will be needed and future time to pay requests will be considered.

If you have a change in circumstances

You should contact us if your situation:

• improves and you can pay the bill quicker, to increase your monthly payment
• worsens, to check how we can reduce your monthly payments

If you cancel your Direct Debit or if a payment fails

If you cancel your monthly payments or payments fail, we’ll contact you. We’ll ask why the monthly payment was not paid. We may be able to restore the payment arrangement or renegotiate it if appropriate.

If we cannot contact you, or we’re not able to renegotiate how much you should pay, we may decide to use our tax debt enforcement powers to collect what you owe. We only use these powers as a last resort.

If you have another new debt to HMRC

We expect new debt to be paid in full, and on time. You should contact us as soon as possible if you cannot pay your tax bill in full .

If you’re already making monthly payments into a Time to Pay arrangement, then this can be amended to include this new debt. Before we can do this, we’ll need to talk to you about your:

• expenditure
• asset position

Welsh translation added.

The guidance has been updated to cover businesses as well as individuals.

How to contact HMRC to discuss a time to pay arrangement has been updated to add when you can set up a payment plan online.

First published.

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