The High Court recently decided on an appeal against a tax determination by the Tax Appeals Commissioner that a write off of a loan was a trading receipt and therefore liable to corporation tax because the original loan was used to purchase land and the land value had been written down which increased the corporation tax losses for the taxpayer.
The relevant legislation is:
“Where, in computing for tax purposes the profits or gains of a trade or profession, a deduction has been allowed for any debt incurred for the purposes of the trade or profession, then, if the whole or any part of that debt is thereafter released, the amount released shall be treated as a receipt of the trade or profession arising in the period in which the release is effected”.
The Court held that it was clear that this legislation applied to where the loan itself is written off as opposed to the underlying asset which was acquired using the proceeds of the loan.
The subsequent write-off should not be considered a trading receipt and taxable as there was no deduction for corporation tax taken for the original loan.
The Court held that there was a clear distinction between the loan and what it was used for.