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HM Revenue and Customs is to introduce corporate tax legislation that amends the loan relationships rules affecting connected companies.

Announced in last week's pre-budget report, the new rules will apply to the release of trade debts owed between connected companies. The change will also amend the rules on the late payment of interest between connected companies.

The rules will cover both intra-group trade debts and to trade debts between non-group companies where an individual controls both companies.

The introduction of this legislation follows the opinion of the ECJ who deemed the current system to be in contravention of the EU's plans for harmonisation of Europe's tax practices which aims to promote fair tax policy and prevent harmful tax competition.

A creditor that formally releases a connected debtor from a trade debt is denied a deduction for the loss on the debt and may be taxed on its profit. Under the new system, the debtor company would not be taxable on the release.

"I think this was needed as the old method was clearly discriminatory," said Nick Cronkshaw, partner, Simmons & Simmons in London. "I am glad that HMRC have made this change voluntarily as it improves the symmetry in this area of tax. This issue has been discussed for a while now, so we are keen to see how it will be implemented."

A further change concerns the rule that allows a debtor company a deduction for interest payable to a connected creditor that is outside the loan relationships rules only on a paid basis, rather than on the accruals basis that normally applies.

"This is a very positive change," said Shiv Mahalingham, head of transfer pricing, Alvarez & Marsal Taxand UK. "Harmonisation of tax practices within Europe is certainly helpful when running a business as it will undoubtedly improve tax security."

The changes will be effective for company accounting periods beginning on or after April 1 2009.