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Beware companies buying back debt

27 November 2009

On 14 October 2009 the Government announced new measures would apply to the tax treatment of companies buying back debt. The draft legislation was published on 9 November.

The reasons for the change are that HM Treasury has decided unilaterally and without consultation that some ways in which the current rules are used are unacceptable.

So it announced new rules will apply from the date of their statement on the subject, i.e. before the date on which any new provisions were published.

The debt buy-back rules were originally introduced to give tax relief where companies were changing hands as part of a corporate rescue and debt was being bought back at a discount.

However, these rules have also been used by companies genuinely in distress and having to restructure, albeit without their ownership changing hands.

Broadly, it means that where the buy-back of debt is part of a genuine corporate rescue, favourable tax treatment will apply. However, the increased list of conditions that must be complied with points to a narrowing of the types of corporate rescue transaction that will fall within the new rules.

More importantly, companies in genuine financial difficulty that are looking to restructure, but without a change in ownership, will not be able to take advantage of the new rules. Consequently, the benefits of any restructuring may now be offset or even outweighed by a large tax bill at a time when such companies are at their most vulnerable.

HM Revenue & Customs has clarified that the new rules will not apply to cases where the offer to acquire the debt was made on or before 14 October, nor will they apply to debt restructurings undertaken prior to 14 October.

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