Finance (No. 2) Bill (HL Bill 156)

Finance (No. 2) BillPage 420

(b) an investment property,

(c) an intangible asset,

(d) goodwill,

(e) shares in a company, or

(f) 5an interest in an entity which entitles the holder to a share of
the profits of the entity.

(6) In subsection (5)—

(a) “plant, property and equipment” has the meaning it has for
accounting purposes;

(b) 10“investment property” has the meaning it has for accounting
purposes;

(c) “intangible asset” has the meaning it has for accounting
purposes (and includes an internally-generated intangible
asset);

(d) 15“goodwill” has the meaning it has for accounting purposes
(and includes internally-generated goodwill);

(e) “entity” includes anything which is treated as an entity in the
financial statements of the group (regardless of whether it
has a legal personality as a body corporate).

20Section 712(2) and (3) of CTA 2009 (“intangible asset” includes
intellectual property) applies for the purposes of paragraph (c).

(7) An amount does not fall within A in subsection (1) if it is brought into
account in determining a profit or loss on the disposal of a relevant
asset.

418 25The capital (fair value movement) adjustment

(1) In section 416, “the capital (fair value movement) adjustment” means
the sum of any relevant fair value movements.

(2) For the purposes of subsection (1) there is a “relevant fair value
movement” where—

(a) 30the carrying value of a relevant asset is measured, for the
purposes of the financial statements of the group, using fair
value accounting, and

(b) an amount representing a change in the carrying value of the
asset is brought into account in determining the group’s
35profit before tax.

(3) The amount of the relevant fair value movement is the amount of the
change mentioned in subsection (2)(b) and—

(a) is a positive amount where the change is a loss;

(b) is a negative amount where the change is a profit.

(4) 40References in this section to a change in the carrying value of a
relevant asset do not include a change where the amount brought
into account in respect of the change as mentioned in subsection
(2)(b) is of a revenue nature.

Finance (No. 2) BillPage 421

419 The capital (disposals) adjustment

(1) For the purposes of section 416, “the capital (disposals) adjustment”
is—


A − B + C

5where—

  • A is the sum of the amounts (if any) that are brought into
    account in determining the group’s profit before tax and that
    represent losses on disposals of relevant assets;

  • B is the sum of the amounts (if any) that are brought into
    10account in determining the group’s profit before tax and that
    represent profits on disposals of relevant assets;

  • C is the sum of any recalculated profit amounts (see subsections
    (2) to (8)).

(2) For the purposes of the definition of C in subsection (1) there is a
15“recalculated profit amount” where the following two conditions are
met.

(3) The first condition is that an amount is brought into account in
determining the group’s profit before tax in respect of a profit or loss
on the disposal of a relevant asset.

(4) 20The second condition is that—

(a) the relevant proceeds, exceeds

(b) the relevant cost.

(5) The amount of the recalculated profit amount is the amount of the
excess mentioned in subsection (4).

(6) 25In this section “the relevant proceeds” means the amount of income
of a capital nature that is brought into account in determining the
profit or loss mentioned in subsection (3).

(7) In this section “the relevant cost” means (subject to subsection (8)) the
amount of expenditure of a capital nature that is brought into
30account in determining the profit or loss mentioned in subsection (3).

(8) For the purposes of subsection (7), any adjustment made to the
amount brought into account as mentioned in that subsection is to be
disregarded where the adjustment is in respect of amounts that—

(a) are otherwise recognised, in the financial statements of the
35group for the relevant period of account, as items of profit or
loss, or

(b) were so recognised in the financial statements of the group
for an earlier period.

(9) References in this section to a relevant asset include part of a relevant
40asset.

(10) References in this section to the disposal of a relevant asset do not
include a disposal where the profit or loss (if any) on the disposal is
of a revenue nature.

Finance (No. 2) BillPage 422

(11) The condition in subsection (3) is met even if no amount is brought
into account as mentioned in that subsection if that is because no gain
or loss accrued on the disposal; and subsections (6) to (8) apply
accordingly.

5Treatment of derivative contracts in financial statements of worldwide group
420 Derivative contracts subject to fair value accounting

(1) This section makes provision about the amounts recognised in a
worldwide group’s financial statements for a period of account (“the
relevant period of account”) in respect of derivative contracts.

(2) 10Subsection (3) applies where one or more excluded derivative
contract amounts are recognised in the group’s financial statements
for the relevant period of account as items of profit or loss.

(3) The financial statements are treated for the purposes of this Part
(apart from this section) as if the excluded derivative contract
15amounts were not recognised in the group’s financial statements for
the relevant period of account.

(4) In subsections (2) and (3) “excluded derivative contract amount”
means an amount which would, on the relevant assumptions, be
excluded from section 597(1) of CTA 2009 (amounts recognised in
20determining a company’s profit or loss) as a result of a relevant
provision of the Disregard Regulations.

(5) Subsection (6) applies where, on the relevant assumptions, one or
more amounts (“replacement derivative contract amounts”) would
be brought into account by members of the group for the purposes of
25corporation tax in relevant accounting periods as a result of
regulation 9 or 10 of the Disregard Regulations.

(6) The financial statements are treated for the purposes of this Part
(apart from this section) as if the replacement derivative contract
amounts were recognised in the group’s financial statements for the
30relevant period of account.

(7) Subsection (9) applies if an accounting period in which a
replacement derivative contract amount would, on the relevant
assumptions, be brought into account for the purposes of
corporation tax contains one or more disregarded periods.

(8) 35A “disregarded period” is any period falling within the accounting
period—

(a) which does not fall within the relevant period of account, or

(b) throughout which the company is not a member of the group.

(9) Where this subsection applies, the replacement derivative contract
40amount mentioned in subsection (7) is reduced by such amount as is
referable, on a just and reasonable basis, to the disregarded period or
periods mentioned in that subsection.

(10) An amount may be reduced to nil under subsection (9).

Finance (No. 2) BillPage 423

421 Derivative contracts subject to fair value accounting: interpretation

(1) In section 420 “the relevant assumptions” means the following
assumptions—

(a) that all members of the group are within the charge to
5corporation tax;

(b) that elections under regulation 6A of the Disregard
Regulations have effect in relation to each derivative contract
of each member of the group;

(c) that paragraph (5) of regulation 7 of the Disregard
10Regulations is of no effect;

(d) that where—

(i) a member of the group (“member A”) holds a
derivative contract,

(ii) the group has a hedging relationship between that
15derivative contract (on the one hand), and an asset,
liability, receipt or expense (on the other), and

(iii) the asset, liability, receipt or expense is held, or is
expected to be received or incurred, by a member of
the group other than member A,

20the asset, liability, receipt or expense is held, or is expected to
be received or incurred, by member A;

(e) that the financial statements of members of the group deal
with derivative contracts and hedged items in the same way
as they are dealt with in the group’s financial statements.

(2) 25For the purposes of subsection (1)(d)(iii) the group has a “hedging
relationship” between a derivative contract (on the one hand) and an
asset, liability, receipt or expense (on the other) if, were those things
held, received or incurred by a single company, the company would
have a hedging relationship between them.

(3) 30Regulation 2(5) of the Disregard Regulations (hedging relationships
of a company) applies for the purposes of this section.

(4) For the purposes of section 420 and this section—

(a) “the Disregard Regulations” means the Loan Relationship
and Derivative Contracts (Disregard and Bringing into
35Account of Profits and Losses) Regulations 2004 (S.I. 2004/
3256);

(b) the following are “relevant provisions” of the Disregard
Regulations—

(i) regulation 7 (fair value profits or losses arising from
40derivative contracts which are currency contracts);

(ii) regulation 8 (profits or losses arising from derivative
contracts which are commodity contracts or debt
contracts);

(iii) regulation 9 (profits or losses arising from derivative
45contracts which are interest rate contracts).

Finance (No. 2) BillPage 424

Effect of group-EBITDA (chargeable gains) election
422 Group-EBITDA (chargeable gains) election

(1) Where a group-EBITDA (chargeable gains) election has effect in
relation to a period of account of a worldwide group (“the relevant
5period of account”), this Chapter applies in relation to the period
subject to this section.

(2) Section 419 (the capital (disposals) adjustment) has effect as if—

(a) the definition of C in subsection (1) of that section did not
apply, and

(b) 10instead, C were defined for the purposes of that section as—

(i) the sum of any relevant gains, less

(ii) the sum of any relevant losses,

or, where that is a negative amount, nil.

(3) For the purposes of this section, there is a “relevant gain” or “relevant
15loss” where condition A or B is met.

(4) Condition A is that a member of the group disposes of a relevant
asset during the relevant period of account.

(5) Condition B is that—

(a) a member of the group ceases to be a member of the group
20during the relevant period of account, and

(b) the member held a relevant asset immediately before ceasing
to be a member of the group.

(6) Where condition A is met, the amount of the relevant gain or relevant
loss is the amount of the chargeable gain or allowable loss that
25would, on the assumptions in subsection (8), accrue to the member
on the disposal.

(7) Where condition B is met, the amount of the relevant gain or relevant
loss is the amount of the chargeable gain or allowable loss that
would, on the assumptions in subsection (8), accrue to the member if
30the member—

(a) disposed of the relevant asset immediately before ceasing to
be a member of the group, and

(b) received such consideration for that disposal as it is just and
reasonable to attribute to it, having regard to the
35consideration received by the group for its interests in the
member.

(8) The assumptions mentioned in subsections (6) and (7) are that—

(a) all members of the group are within the charge to corporation
tax;

(b) 40Schedule 7AC to TCGA 1992 (exemptions for disposals by
companies with substantial shareholdings) is of no effect;

(c) Part 2 (double taxation relief) is of no effect.

(9) Where—

(a) the sum of any relevant losses, exceeds

(b) 45the sum of any relevant gains,

Finance (No. 2) BillPage 425

the amount of the excess is treated as a relevant loss in relation to the
period of account of the group immediately after the relevant period
of account.

(10) In this section “relevant asset” does not include shares in (or other
5interests giving an entitlement to share in the profits of) a member of
the group.

Effect of interest allowance (alternative calculation) election
423 Capitalised interest brought into account for tax purposes in
accordance with GAAP

(1) 10Where an interest allowance (alternative calculation) election (see
paragraph 16 of Schedule 7A) has effect in relation to a period of
account of a worldwide group (“the relevant period of account”), this
Chapter applies in relation to the period subject to this section.

(2) Section 413 (adjusted net group-interest expense of a worldwide
15group) has effect as if—

(a) subsections (3)(a) and (4)(a) (which relate to capitalised
interest) did not apply in relation to a GAAP-taxable asset or
liability, and

(b) subsections (3)(b) and (4)(b) (which relate to capitalised
20interest written off) did not apply in relation to a GAAP-
taxable asset or liability.

(3) But subsection (2)(b) of this section is of no effect where the adjusted
net group-interest expense of the group for a period of account
before the relevant period of account included any amount by virtue
25of section 413(3)(a) or (4)(a) in respect of the GAAP-taxable asset or
liability.

(4) For the purposes of this section an asset or liability is “GAAP-
taxable” if any profit or loss for corporation tax purposes in relation
to the asset or liability falls to be calculated in accordance with
30generally accepted accounting practice.

(5) For the purposes of this section, all members of the group are treated
as within the charge to corporation tax.

424 Employers’ pension contributions

(1) Where an interest allowance (alternative calculation) election has
35effect in relation to a period of account of a worldwide group, this
Chapter applies in relation to the period subject to this section.

(2) The definition of “the group’s profit before tax” in subsection (2) of
section 416 has effect as if references to amounts that are recognised
in the financial statements of the group for the period, as items of
40profit or loss, did not include amounts so recognised in respect of
employer pension contributions.

(3) The group’s profit before tax, for the purposes of that section, is
reduced by the total of the relief to which members of the group are
entitled, by virtue of sections 196 to 200 of FA 2004, in respect of
45relevant employer pension contributions paid during the period.

Finance (No. 2) BillPage 426

(4) In this section—

(a) “employer pension contributions” means contributions paid
by an employer under a registered pension scheme in respect
of an individual;

(b) 5employer pension contributions are “relevant” if they are
paid at a time at which the employer is a member of the
group.

425 Employee share acquisitions

(1) Where an interest allowance (alternative calculation) election has
10effect in relation to a period of account of a worldwide group, this
Chapter applies in relation to the period subject to this section.

(2) The definition of “the group’s profit before tax” in subsection (2) of
section 416 has effect as if references to amounts that are recognised
in the financial statements of the group for the period, as items of
15profit or loss, did not include amounts so recognised in respect of
employee share acquisition arrangements.

(3) The group’s profit before tax, for the purposes of that section, is
reduced by such amount as, on a just and reasonable basis, reflects
the effect on the group in the period of—

(a) 20deductions that would, on the assumption in subsection (4),
be allowed to members of the group under Part 11 of CTA
2009 (relief for particular employee share acquisition
schemes,

(b) amounts that would, on that assumption, be treated as
25received by members of the group under that Part, and

(c) relief that would, on that assumption, be given to members of
the group under Part 12 of that Act (other relief for employee
share acquisitions).

(4) The assumption mentioned in subsection (3) is that all members of
30the group are within the charge to corporation tax.

(5) In this section “employee share acquisition arrangements” means
arrangements in respect of which—

(a) deductions are allowed, or amounts are treated as received,
under Part 11 of CTA 2009, or

(b) 35relief is given under Part 12 of CTA 2009.

426 Changes in accounting policy

(1) Where an interest allowance (alternative calculation) election has
effect in relation to a period of account of a worldwide group (“the
relevant period of account”), this Chapter applies in relation to the
40period subject to this section.

(2) The financial statements of the group for the relevant period of
account are to be treated as subject to such adjustments as would be
made to them under the change of accounting policy provisions if the
group were a company that—

(a) 45was within the charge to corporation tax,

(b) held the assets and owed the liabilities recognised in the
financial statements, to the extent that they are so recognised,
and

Finance (No. 2) BillPage 427

(c) carried on the trades and other activities giving rise to
amounts recognised in the financial statements as items of
profit and loss.

(3) In this section “the change of accounting policy provisions” means—

(a) 5Chapter 14 of Part 3 of CTA 2009 (trading profits);

(b) sections 315 to 319 of that Act (loan relationships);

(c) sections 613 to 615 of that Act (derivative contracts);

(d) Chapter 15 of Part 8 of that Act (intangible fixed assets);

(e) the Loan Relationships and Derivative Contracts (Change of
10Accounting Practice) Regulations 2004 (S.I. 2004/3271S.I. 2004/3271).

(4) For the purposes of subsection (2)—

(a) the change of accounting policy provisions are to be read
subject to the necessary modifications, and

(b) it is to be assumed that any election under the change of
15accounting policy provisions (as applied) has been made.

Effect of interest allowance (non-consolidated investment) election
427 Group interest and group-EBITDA

(1) Where an interest allowance (non-consolidated investment) election
(see paragraph 17 of Schedule 7A) has effect in relation to a period of
20account of a worldwide group, this Chapter applies in relation to the
period subject to this section.

(2) In this section and section 428 (which contains further interpretative
provision)—

(a) “the principal worldwide group” means the worldwide
25group mentioned in subsection (1);

(b) “the relevant period of account” means the period of account
mentioned in subsection (1).

(3) The financial statements of the principal worldwide group for the
relevant period of account are treated as if—

(a) 30no amounts were recognised in them, as items of profit or
loss, in respect of relevant income matters so far as they relate
to financial liabilities owed to any member of the principal
worldwide group by any member of an associated
worldwide group, and

(b) 35no amounts were recognised in them, as items of profits or
loss, in respect of any profit or loss attributable to an interest
held by any member of the principal worldwide group in any
member of an associated worldwide group

(4) The adjusted net group-interest expense of the principal worldwide
40group for the relevant period of account is treated as increased by the
appropriate proportion of the adjusted net group-interest expense
for the period of each associated worldwide group.

(5) The qualifying net group-interest expense of the principal
worldwide group for the relevant period of account is treated as
45increased by the appropriate proportion of the qualifying net group-
interest expense for the period of each associated worldwide group.

Finance (No. 2) BillPage 428

(6) The group-EBITDA of the principal worldwide group for the
relevant period of account is treated as increased by the appropriate
proportion of the group-EBITDA of each associated worldwide
group for the period.

(7) 5In this section “the appropriate proportion”, in relation to an
associated worldwide group means the proportion of the profits or
losses of the associated worldwide group arising in the relevant
period of account to which the principal worldwide group is
entitled.

428 10Section 427: associated worldwide groups

(1) This section has effect for the purposes of section 427 and this section.

(2) “Associated worldwide group” means the worldwide group of
which a specified non-consolidated associate is the ultimate parent.

(3) Where (apart from this subsection) a specified non-consolidated
15associate does not fall within section 473(1)(a) (conditions for being
the ultimate parent of a worldwide group), it is treated as if it did fall
within that provision.

(4) Where (apart from this subsection) financial statements of an
associated worldwide group are not drawn up in respect of the
20relevant period of account, IAS financial statements of the associated
worldwide group are treated as having been drawn up in respect of
that period.

(5) The associated worldwide group’s financial statements for the
relevant period of account are treated as if no amounts were
25recognised in them, as items of profit or loss, in respect of relevant
expense matters so far as they relate to financial liabilities owed to
any member of the principal worldwide group by any member of the
associated worldwide group.

(6) The reference in section 427(6) to profits or losses of the associated
30worldwide group to which the principal worldwide group is entitled
does not include any profits or losses that relate to times when the
non-consolidated associate is a member of the principal worldwide
group.

(7) Subsection (8) has effect in the application of this Part (for the
35purposes mentioned in subsection (1)) in relation to the financial
statements of an associated worldwide group for the relevant period
of account.

(8) The associated worldwide group is treated—

(a) as having made an interest allowance (alternative
40calculation) election if and only if such an election has effect
in relation to the relevant period of account of the principal
worldwide group, and

(b) as not having made any other election under this Part.

(9) In this section “specified” means specified in the interest allowance
45(non-consolidated investment) election.

Finance (No. 2) BillPage 429

429 Meaning of “non-consolidated associate”

(1) An entity is a “non-consolidated associate” of a worldwide group, in
relation to a period of account of the group (“the relevant period of
account”) if condition A, B or C is met.

(2) 5Condition A is that the entity is accounted for in the financial
statements of the group for the relevant period of account—

(a) as a joint venture or an associate, and

(b) using the gross equity method or the equity method.

(3) Condition B is that—

(a) 10the entity is a partnership, and

(b) an interest allowance (consolidated partnership) election has
effect in relation to the relevant period of account.

(4) Condition C is the entity is a non-consolidated subsidiary of the
ultimate parent at any time during the relevant period of account.

(5) 15In this section the following expressions have the meaning they have
for accounting purposes—

  • “associate”;

  • “equity method”;

  • “gross equity method”;

  • 20“joint venture”.

(6) In this section “entity” includes anything which is treated as an entity
in the financial statements of the worldwide group (regardless of
whether it has a legal personality as a body corporate).

(7) This section has effect for the purposes of this Part.

25Effect of interest allowance (consolidated partnerships) election
430 Interest allowance (consolidated partnerships) election

(1) Where an interest allowance (consolidated partnerships) election
(see paragraph 18 of Schedule 7A) has effect in relation to a period of
account of a worldwide group, this Chapter applies in relation to the
30period subject to this section.

(2) The financial statements of the group for the period are treated as
if—

(a) no amounts were recognised in them, as items of profit or
loss, in respect of any income or expenses of a specified
35consolidated partnership, and

(b) instead, each specified consolidated partnership were
accounted for using the equity method.

(3) In subsection (2)(b) “the equity method” has the meaning it has for
accounting purposes.

(4) 40In this Part “consolidated partnership”, in relation to a period of
account of a worldwide group, means a partnership in relation to
which conditions A and B are met.