§ Mr. CohenTo ask the Chancellor of the Exchquer if he will make a statement on the tax treatment of bad debts on loans made to organisations which are not bankrupt. [35936]
§ Mr. JackThe calculation of trading profit for tax purposes follows general accounting principles which, broadly, determine that income and expenditure should be brought into account on an accruals basis. This means that a trader may be charged to tax on money owed to the business in an accounting period even if the money is not actually received. However, if a particular debt to a business is bad or considered by the trader as being doubtful, a deduction may be given in the accounting period in which the debt becomes bad or is considered as doubtful, in effect cancelling out the charge to tax on so much of that debt as is viewed as bad or doubtful.
Capital items—income and expenditure—are excluded form the computation of taxable profits. Generally, loans will be on capital account, with the result that no account may be taken of the extent to which they are bad or doubtful in arriving at the profits for tax purposes, unless they are made in the course of a trade of banking or moneylending or as an adjunct, or as an essential part, of some other trade.
Relief may, however, be given as a capital loss when loans to traders prove irrecoverable, or when a guarantor of a loan to a trade is obliged to make a payment under the guarantee.
Whether a debt is bad or doubtful depends on the particular facts. But while bankruptcy or insolvency of the debtor may be evidence that a debt is bad or doubtful, it 38W is not an absolute requirement at a debtor be insolvent or bankrupt before a debt can be bad or doubtful for tax purposes.