Income Tax (Trading and Other Income) Act 2005 section 97

Debts incurred and later released

Section 97 deals with the tax treatment of trade debts that were previously deducted as expenses but are subsequently released or forgiven.

• Where a trading expense has been deducted in calculating profits and creates a debt, any later release of that debt must be brought back into the profit calculation as a trading receipt.
• The amount released is treated as arising on the date the release takes place, ensuring it falls into the correct accounting period.
• An exception applies where the debt is released as part of a statutory insolvency arrangement, in which case the released amount is not treated as a trading receipt.
• If the trader has ceased trading before the debt is released, the amount is instead taxed as a post-cessation receipt rather than a normal trading receipt.