Understanding CVA debt write-offs and tax

Corporate debt in the UK falls under specific taxation legislation known as the loan relationship rules. This legal framework, initially introduced by the Finance Act 1996, later became part of the Corporation Tax Act 2009.

Now, what exactly constitutes a ‘loan relationship’? According to the legislation’s definition:

“For the purposes of the Corporation Tax Acts, a company has a loan relationship if:

(a) the company stands in the position of a creditor or debtor regarding any money debt (whether by reference to a security or otherwise), and

(b) the debt arises from a transaction for the lending of money.”

For a loan relationship to exist, both conditions must be met. However, additional rules come into play when a company engages in a Company Voluntary Arrangement (CVA). 


How does a Company Voluntary Arrangement work?

A licensed insolvency practitioner (IP) is designated to oversee the administration of the Company Voluntary Arrangement, aimed at providing directors with an opportunity to navigate through challenging circumstances. While the company might have encountered an unforeseen decline in trade, it must demonstrate long-term viability.

The IP puts forth a proposal to creditors outlining the repayment of a portion of their debt – for instance, 40 pence for every pound owed. If the creditors endorse the proposal, they are consenting to a write-off of 60% of their debt at the conclusion of the CVA term.


What happens when debts are written off under a CVA?

A debt is discharged or written off when a creditor releases their debtor from the obligation to repay. In typical circumstances, this credit would be recorded in the debtor company’s books as an exceptional item in the profit and loss account.

Consequently, it becomes subject to taxation under the loan relationship rules. Nevertheless, when a company undergoes a statutory insolvency procedure, exceptions to the loan relationship rules may be applied in specific circumstances.

Read More:


Not assessable for corporation tax

Because the credit arises from a statutory insolvency procedure – a Company Voluntary Arrangement (CVA) – an exception is granted under the loan relationship rules. The portion of debt released due to the CVA becomes part of the distressed company’s revenue reserves. Importantly, it remains non-assessable for corporation tax.

Without this exception, the resultant tax liability – potentially a substantial amount – could severely impact the company’s financial standing and overall recovery at the conclusion of the CVA term. In essence, it could potentially negate any trading improvements achieved over the preceding five or six years.

If your company is facing financial decline, and you are worried about insolvency, our experts at Vanguard Insolvency can offer professional guidance and assistance. We will assess the company’s current financial position and provide advice on the most suitable options. Contact one of our team members to schedule a free same-day consultation. With offices spanning from Inverness to Exeter, Vanguard Insolvency can deliver unparalleled director advice across the UK.

Senior Partner at Vanguard Insolvency Practitioners | Website | + posts

I am an insolvency professional with a distinguished career specialising in commercial insolvency, adeptly navigating Creditors Voluntary Liquidation, Company Voluntary Arrangements, and Company Administrations. With a comprehensive understanding of insolvency laws and an unwavering commitment to ethical practices.