Finance Bill

House of Commons

Session 2002 - 03
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Finance Bill

Finance Bill
Schedule 10 — Amendment of enactments that operate by reference to accounting practice
Part 1 — Loan relationships
313

for an accounting period an amount in respect of a release
of any liability under a debtor relationship, and”.
      (8)
In the closing words of sub-paragraph (15) omit “under paragraph 5(1)”.
      (9)
In sub-paragraph (19), in the definition of “related debt recovery credit” for
“by virtue of paragraph 5(2) above in connection with a bad debt” substitute
5
“in connection with a debt”.
22    (1)
Paragraph 6 (bad debts etc where parties have a connection) is amended as
follows.
      (2)
In the heading for “Bad debt etc” substitute “Impairment losses”.
      (3)
In sub-paragraph (1) for “requires an authorised accruals basis of accounting
10
to be used” substitute “(accounting method where parties have a
connection) applies”.
      (4)
In sub-paragraph (2) omit “in accordance with that accounting method”.
      (5)
For sub-paragraph (3) substitute—
     “(3)
An impairment loss may be brought into account for the purposes
15
of this Chapter only in accordance with—
(a)
sub-paragraph (4) below,
(b)
paragraph 6A, or
(c)
paragraph 6B.”.
      (6)
After that sub-paragraph insert—
20
    “(3A)
Where an impairment loss is excluded by sub-paragraph (3), no
credit in respect of any reversal of the impairment shall be brought
into account for the purposes of this Chapter.”.
      (7)
In sub-paragraph (4) for “A departure from that assumption shall be
allowed” substitute “An impairment loss is not excluded by sub-paragraph
25
(3)”.
23    (1)
Paragraph 6A (bad debts etc.: parties having connection and creditor in
insolvent liquidation etc.) is amended as follows.
      (2)
In the heading for “Bad debt etc” substitute “Impairment losses”.
      (3)
In sub-paragraph (2) for the words from “a departure” to “shall be allowed”
30
substitute “an impairment loss is not excluded by paragraph 6(3)”.
24    (1)
Paragraph 6B (bad debts etc.: companies becoming connected) is amended
as follows.
      (2)
In the heading for “Bad debt etc” substitute “Impairment losses”.
      (3)
In sub-paragraph (1) for the words following paragraph (b) substitute “an
35
impairment loss is not excluded by paragraph 6(3) in the following two
cases”.
      (4)
In sub-paragraph (2)—
(a)
for the opening words down to “if—” substitute “The first case is
where—”;
40
(b)
in paragraph (a) for “a departure has been allowed under paragraph
5(1) above” substitute “an impairment loss has been brought into
account for the purposes of this Chapter”.
      (5)
In sub-paragraph (3) for “A departure shall be allowed” substitute “An
impairment loss may be brought into account”.
45

Finance Bill
Schedule 10 — Amendment of enactments that operate by reference to accounting practice
Part 1 — Loan relationships
314

      (6)
For sub-paragraph (5) substitute—
     “(5)
The second case is where the following conditions are met.”.
      (7)
In sub-paragraph (7) for “A departure shall be allowed” substitute “An
impairment loss may be brought into account”.
25    (1)
Paragraph 6C (bad debts etc.: cessation of connection) is amended as
5
follows.
      (2)
In the heading for “Bad debt etc: departure not permitted by paragraph 6:”
substitute “Impairment losses:”.
      (3)
For sub-paragraph (1)(a) substitute—
“(a)
an impairment loss is excluded by paragraph 6(3) in any
10
accounting period, and”.
      (4)
In sub-paragraph (2) omit “by virtue of paragraph 5(2) above”.
26
In paragraph 8 (restriction on writing off overseas sovereign debts etc.), for
sub-paragraphs (1) and (2) substitute—
     “(1)
This paragraph applies as respects the debits and credits to be
15
brought into account for the purposes of this Chapter in respect of
the impairment of a financial asset representing a relevant
overseas debt.

This paragraph does not apply where fair value accounting is
used.
20
      (2)
Where this paragraph applies the debits and credits to be so
brought into account for any accounting period shall be
determined on the basis that it is not permissible for the asset to be
impaired by more than the relevant percentage.”.
27    (1)
Paragraph 9 (further restriction on bringing into account losses on overseas
25
sovereign debt etc.) is amended as follows.
      (2)
In sub-paragraph (1) for paragraphs (a) and (b) substitute—
“(a)
an impairment loss falls to be brought into account for the
purposes of this Chapter in respect of a relevant overseas
debt in relation to which any of the conditions in sub-
30
paragraph (2) is met,
(b)
in the accounting period in which that loss falls to be so
brought into account (“the loss period”) the company
ceases to be a party to the loan relationship,”.
      (3)
In sub-paragraph (2)—
35
(a)
for the opening words down to “if—” substitute “The conditions
referred to in sub-paragraph (1)(a) are—”;
(b)
in paragraph (b)—
(i)
after “Chapter” insert “for a period of account of the company
beginning before 1st January 2005”, and
40
(ii)
for “paragraph 5(1)(a) to (c) above” substitute “paragraph
5(1)(a) to (c) of this Schedule as it had effect before its
amendment by Schedule 10 to the Finance Act 2004”;
(c)
omit the “or” at the end of paragraph (b);
(d)
after that paragraph insert—
45
“(ba)
an impairment loss in respect of the debt has been
brought into account for the purposes of this

Finance Bill
Schedule 10 — Amendment of enactments that operate by reference to accounting practice
Part 1 — Loan relationships
315

Chapter for a period of account of the company
beginning on or after 1st January 2005; or”.
28
In paragraph 10 (imported losses etc.), for sub-paragraph (1) substitute—
     “(1)
This paragraph applies in the case of a company (“the chargeable
company”) for an accounting period (“the loss period”) where—
5
(a)
there is a loss arising in connection with a loan relationship
of the company which apart from this paragraph would
fall to be brought into account for the purposes of this
Chapter, and
(b)
that loss is referable in whole or in part to a time when the
10
relationship was not subject to United Kingdom taxation.

This paragraph does not apply where fair value accounting is
used.”.
29
In paragraph 10A (deemed disposal on company ceasing to be resident in
UK etc.), omit sub-paragraph (5).
15
30
In paragraph 11 (transactions not at arm’s length), for sub-paragraph (1)
substitute—
     “(1)
Where—
(a)
debits or credits in respect of a loan relationship of a
company fall to be brought into account for the purposes
20
of this Chapter in respect of a related transaction, and
(b)
that transaction is not a transaction at arm’s length,

the debits or credits to be brought into account shall be
determined on the assumption that the transaction was entered
into on the terms on which it would have been entered into
25
between independent persons.

This is subject to the exceptions in sub-paragraphs (1A), (2), (3)
and (3A).”.
31
In paragraph 12 (continuity of treatment: groups etc.), in sub-paragraph
(2A)—
30
(a)
in the opening words for “an authorised mark to market basis of
accounting” substitute “fair value accounting”;
(b)
at the end of paragraph (a) insert “; and”; and
(c)
omit paragraph (b) and the word “and” preceding it.
32
In paragraph 13 (loan relationships for unallowable purposes), in the closing
35
words of sub-paragraph (1) omit “given by the authorised accounting
method used”.
33    (1)
Paragraph 14 (debits and credits treated as relating to capital expenditure) is
amended as follows.
      (2)
In sub-paragraph (1) omit “given by an authorised accounting method”.
40
      (3)
After sub-paragraph (3) add—
“(4)
Where a debit is brought into account by a company in accordance
with sub-paragraph (1), no debit shall be brought into account in
respect of—
(a)
the writing down of so much of the value of the fixed
45
capital asset or project as is attributable to that debit, or

Finance Bill
Schedule 10 — Amendment of enactments that operate by reference to accounting practice
Part 1 — Loan relationships
316

(b)
so much of any amortisation or depreciation as represents
a writing off of the interest component of the asset.”.
34
In paragraph 16 (amounts imputed under Schedule 28AA to the Taxes Act
1988), in sub-paragraph (2) omit “, notwithstanding the provisions of any
authorised accounting method,”.
5
35    (1)
Paragraph 19 (partnerships involving companies) is amended as follows.
      (2)
Omit sub-paragraph (10).
      (3)
For sub-paragraph (11) substitute—
    “(11)
Where the company partner uses fair value accounting in relation
to its interest in the partnership, the debits and credits to be
10
brought into account under this paragraph by that company must
be determined on the basis of fair value accounting.”.
      (4)
In sub-paragraph (12) for the words from “carried to or sustained by a
reserve” to the end substitute “recognised in the firm’s statement of
recognised gains and losses or statement of changes in equity”.
15
36
After paragraph 19 insert—
“Adjustment on change of accounting policy
19A   (1)
This paragraph applies where—
(a)
there is a change of accounting policy in drawing up a
company’s accounts from one period of account (the
20
“earlier period”) to the next (the “later period”), and
(b)
the approach in each of those periods accorded with the
law and practice applicable in relation to that period.
      (2)
This paragraph applies, in particular, where—
(a)
the company prepares accounts for the earlier period in
25
accordance with UK generally accepted accounting
practice and for the later period in accordance with
international accounting standards, or
(b)
the company prepares accounts for the earlier period in
accordance with international accounting standards and
30
for the later period in accordance with UK generally
accepted accounting practice.
      (3)
If there is a difference between—
(a)
the accounting value of an asset or liability representing a
loan relationship of the company at the end of the earlier
35
period, and
(b)
the accounting value of that asset or liability at the
beginning of the later period,

a corresponding debit or credit (as the case may be) shall be
brought into account for the purposes of this Chapter in the later
40
period.
      (4)
In sub-paragraph (3) “accounting value” means the carrying value
of the asset or liability recognised for accounting purposes.
      (5)
This paragraph does not apply if or to the extent that such a debit
or credit as is mentioned in sub-paragraph (3) falls to be brought
45
into account apart from this paragraph.

Finance Bill
Schedule 10 — Amendment of enactments that operate by reference to accounting practice
Part 1 — Loan relationships
317

      (6)
Where or to the extent that an adjustment is made under this
paragraph, no adjustment under Schedule 22 (computation of
profits: adjustment on change of basis) shall be made.
Power to make further provision by regulations
19B   (1)
The Treasury may by regulations make provision for cases where
5
there is a change of accounting policy in drawing up a company’s
accounts from one period of account to the next affecting the
amounts to be brought into account for accounting purposes in
respect of the company’s loan relationships.
      (2)
The regulations may provide for any debits or credits that would
10
otherwise be brought into account for the purposes of this
Chapter—
(a)
not to be brought into account,
(b)
to be brought into account only to a prescribed extent, or
(c)
to be brought into account over a prescribed period or in
15
prescribed circumstances.
      (3)
Regulations under this paragraph may, in particular, modify the
operation of paragraph 19A.
      (4)
The power to make regulations under this paragraph includes
power—
20
(a)
to make different provision for different cases, and
(b)
to make such consequential, supplementary, incidental or
transitional provision, or savings, as appear to the
Treasury to be necessary or expedient.”.
Collective investment schemes etc.
25
37
Schedule 10 to the Finance Act 1996 (c. 8) (loan relationships: collective
investment schemes) is amended as follows.
38
For paragraph 1A (investment trusts and venture capital trusts: capital
reserves) substitute—
“Investment trusts: capital profits, gains or losses
30
1A    (1)
Capital profits, gains or losses arising to an investment trust from
a creditor relationship must not be brought into account as credits
or debits for the purposes of this Chapter.
      (2)
For the purposes of this paragraph “capital profits, gains or
losses”—
35
(a)
in the case of an investment trust that prepares accounts in
accordance with UK generally accepted accounting
practice, has the meaning given by sub-paragraphs (3) and
(4), and
(b)
in the case of an investment trust that prepares accounts in
40
accordance with international accounting standards, has
the meaning given by order made by the Treasury.
      (3)
In the cases mentioned in sub-paragraph (2)(a) capital profits,
gains or losses arising from a creditor relationship in an
accounting period are profits, gains or losses that are carried to or
45

Finance Bill
Schedule 10 — Amendment of enactments that operate by reference to accounting practice
Part 1 — Loan relationships
318

sustained by a capital reserve in accordance with the Statement of
Recommended Practice.
      (4)
For the purposes of this paragraph the Statement of
Recommended Practice is, for an accounting period for which it is
required or permitted to be used—
5
(a)
the Statement of Recommended Practice relating to
Investment Trust Companies, issued by the Association of
Investment Trust Companies in January 2003, as from time
to time modified, amended or revised, or
(b)
any subsequent Statement of Recommended Practice
10
relating to investment trusts, as from time to time
modified, amended or revised.
Venture capital trusts: capital profits, gains or losses
1B    (1)
Capital profits, gains or losses arising to a venture capital trust
from a creditor relationship must not be brought into account as
15
credits or debits for the purposes of this Chapter.
      (2)
For the purposes of this paragraph “capital profits, gains or
losses”—
(a)
in the case of a venture capital trust that prepares accounts
in accordance with UK generally accepted accounting
20
practice, has the meaning given by sub-paragraphs (3) and
(4), and
(b)
in the case of a venture capital trust that prepares accounts
in accordance with international accounting standards,
has the meaning given by order made by the Treasury.
25
      (3)
In the cases mentioned in sub-paragraph (2)(a) capital profits,
gains or losses arising from a creditor relationship in an
accounting period are profits, gains or losses that—
(a)
are carried to or sustained by a capital reserve in
accordance with the Statement of Recommended Practice
30
as if the venture capital trust were an investment trust, or
(b)
would be so carried to or sustained by a capital reserve if
the venture capital trust were an investment trust and
were using the Statement of Recommended Practice.
      (4)
For the purposes of this paragraph the Statement of
35
Recommended Practice is, in relation to an accounting period for
which it is required or permitted to be used—
(a)
the Statement of Recommended Practice relating to
Investment Trust Companies, issued by the Association of
Investment Trust Companies in January 2003, as from time
40
to time modified, amended or revised, or
(b)
any subsequent Statement of Recommended Practice
relating to investment trusts, as from time to time
modified, amended or revised.”.
39    (1)
Paragraph 2A (authorised unit trusts) is amended as follows.
45
      (2)
In the heading at the end add “: capital profits, gains or losses”.
      (3)
In sub-paragraph (1) omit “, notwithstanding section 84(2)(b) of this Act”.

Finance Bill
Schedule 10 — Amendment of enactments that operate by reference to accounting practice
Part 1 — Loan relationships
319

      (4)
After that sub-paragraph insert—
    “(1A)
For the purposes of this paragraph “capital profits, gains or
losses”—
(a)
in the case of an authorised unit trust that prepares
accounts in accordance with UK generally accepted
5
accounting practice, has the meaning given by sub-
paragraphs (2) to (4), and
(b)
in the case of an authorised unit trust that prepares
accounts in accordance with international accounting
standards, has the meaning given by order made by the
10
Treasury.”.
      (5)
In sub-paragraph (2) for the words “For the purposes of this paragraph”
substitute “In the cases mentioned in sub-paragraph (1A)(a)”.
      (6)
In sub-paragraph (5) after “the definition of capital profits, gains or losses”
insert “in sub-paragraphs (2) to (4)”.
15
40    (1)
Paragraph 2B (open-ended investment companies) is amended as follows.
      (2)
In the heading at the end add “: capital profits, gains or losses”.
      (3)
In sub-paragraph (1) omit “, notwithstanding section 84(2)(b) of this Act”.
      (4)
After that sub-paragraph insert—
    “(1A)
For the purposes of this paragraph “capital profits, gains or
20
losses”—
(a)
in the case of a company that prepares accounts in
accordance with UK generally accepted accounting
practice, has the meaning given by sub-paragraphs (2) to
(4), and
25
(b)
in the case of a company that prepares accounts in
accordance with international accounting standards, has
the meaning given by order made by the Treasury.”.
      (5)
In sub-paragraph (2) for the words “For the purposes of this paragraph”
substitute “In the cases mentioned in sub-paragraph (1A)(a)”.
30
      (6)
In sub-paragraph (5) after “the definition of capital profits, gains or losses”
insert “in sub-paragraphs (2) to (4)”.
41    (1)
Paragraph 4 (company holdings in unit trusts and offshore funds) is
amended as follows.
      (2)
For sub-paragraph (3) substitute—
35
     “(3)
The debits and credits to be brought into account for the purposes
of this Chapter as respects the company’s relevant holdings must
be determined on the basis of fair value accounting.”.
      (3)
In sub-paragraph (4) for the words from the beginning to “for the purposes
of this Chapter,” substitute “Sub-paragraph (3) shall not be taken, as respects
40
any accounting period,”.
42
In Schedule 11 to the Finance Act 1996 (c. 8) (loan relationships: special
provision for insurers), in paragraph 1(1A) for “sections 92(1)(f), 93(1)(a) and
(b) and 96(1)(b)” substitute “section 96(1)(b).