Is your loan relationship evidence in place?

Wednesday 14th September 2011

The case of MJP Media Services concerned a subsidiary’s claim that there had been “transaction(s) for the lending of money” with its ultimate parent company for the purposes of the loan relationships legislation and the consequent partial waiver of the loan qualified for tax relief under that legislation (as it then stood).

The Upper Tribunal has recently (2 September 2011) affirmed the First-tier Tribunal’s decision that there was insufficient evidence of “transaction(s) for the lending of money” where:

  • contemporaneous records for the transactions were not adduced in evidence (such as full bank statements showing movements of cash: in this case the appellant had difficulty producing them); and
  • none of the witnesses had first-hand knowledge of the transactions in question.

Consequently the Upper Tribunal did not need to consider arguments on whether the partial waiver qualified for tax relief (the relevant loan relationships legislation has since been amended but, for completeness, the First-tier Tribunal had determined tax relief would not be available).

The case remains of relevance in emphasising the need for companies, where reliance on the loan relationships legislation is sought, to:

  • put in place at the appropriate time accurate and contemporaneous documentary evidence of transactions for the lending of money;
  • retain business records (such as bank statements and loan documentation) for periods required by tax legislation; and
  • ensure (to the extent possible) there is the actual movement of cash (which of course would be evidenced by bank statements together with appropriate documentary evidence) from, for example, company A to company B to allow company B to settle third party obligations (as opposed to having company A settle such obligations on company B’s behalf).