Finance Bill

House of Commons

Session 2004 - 05
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Finance Bill

Finance Bill
Schedule 7 — Accounting practice and related matters
Part 1 — Bad debts and related matters
175

      (6)
After sub-paragraph (7) insert—
    “(8)
Condition 5 is that the release is in consideration of, or of any
entitlement to, shares forming part of the ordinary share capital of
the debtor company.”.
12
After paragraph 5 of Schedule 9 to FA 1996 insert—
5
“Release of liability under creditor relationship: application of provisions relating to
impairment losses
5ZA
The provisions of—
(a)
paragraph 5A (impairment losses and consortium relief),
and
10
(b)
paragraphs 6, 6A and 6C (restrictions on bringing
impairment losses into account),

apply in relation to a debit in respect of a release by a company of
liability under a creditor relationship of the company as they
apply in relation to an impairment loss.”.
15
13    (1)
Paragraph 6 of Schedule 9 to FA 1996 (impairment losses where parties have
a connection) is amended as follows.
      (2)
In sub-paragraph (2) for “sub-paragraphs (3) to (6) and paragraphs 6A and
6B” substitute “sub-paragraph (3) (and the provisions mentioned there) and
sub-paragraph (6)”.
20
      (3)
In sub-paragraph (3) for paragraphs (a) to (c) substitute—
“(a)
sub-paragraph (4) below, or
(b)
paragraph 6A.”.
      (4)
For sub-paragraphs (6) and (7) substitute—
    “(6)
Where in any period a related transaction takes place in relation to
25
the loan relationship—
(a)
the debits brought into account for that period in respect of
the relationship must not be more than they would have
been if the transaction had not taken place, and
(b)
the credits brought into account for that period in respect
30
of the relationship must not be less than they would have
been if the transaction had not taken place.
      (7)
In determining for the purposes of sub-paragraph (6) the debits
and credits that would have been brought into account if the
related transaction had not taken place, no account shall be taken
35
of any amounts that would have accrued at times after the
transaction took place.”.
      (5)
The amendments in this paragraph have effect in relation to any related
transaction taking place on or after 2nd December 2004.
14
Omit paragraph 6B of Schedule 9 to FA 1996 (impairment losses: companies
40
becoming connected).
15
In paragraph 6C of Schedule 9 to FA 1996—
(a)
in sub-paragraph (1), for “sub-paragraphs (2) and (3) below shall
apply” substitute “sub-paragraph (3) applies, and

Finance Bill
Schedule 7 — Accounting practice and related matters
Part 1 — Bad debts and related matters
176

(b)
omit sub-paragraph (2).
16
After paragraph 6C of Schedule 9 to FA 1996 insert—
“Restriction on bringing into account debits resulting from revaluation
6D    (1)
No debit shall be brought into account for the purposes of this
Chapter as a result of the revaluation of an asset representing a
5
creditor relationship of a company, except—
(a)
an impairment loss, or
(b)
a debit resulting from a release by the company of any
liability under the relationship.
      (2)
No credit may be brought into account for the purposes of this
10
Chapter in respect of the reversal of—
(a)
a debit disallowed by sub-paragraph (1),
(b)
a debit that in a period of account beginning before 1st
January 2005 was disallowed for tax purposes—
(i)
because of the assumption required by paragraph
15
5(1) above, or
(ii)
because the exceptions in section 74(1)(j) of the
Taxes Act 1988 did not apply.
      (3)
The reference in sub-paragraph (1) to revaluation of an asset
includes any case where a provision or allowance is made by the
20
company reducing the carrying value of the asset or of a group of
assets including the asset in question.
      (4)
This paragraph does not affect the debits to be brought into
account in respect of exchange gains or losses.
      (5)
This paragraph does not apply if fair value accounting is used.”.
25
17    (1)
The following provisions of Schedule 9 to FA 1996 shall cease to have
effect—
(a)
paragraph 8 (restriction on writing off overseas sovereign debt etc.);
(b)
paragraph 9 (restriction on bringing into account losses on overseas
sovereign debt etc.).
30
      (2)
Where at the end of the last period of account of a company before sub-
paragraph (1)(a) has effect—
(a)
the company is one to which a relevant overseas debt (within the
meaning of paragraph 8) is owed, and
(b)
the effect of that paragraph (or a corresponding earlier enactment)
35
having applied is that the aggregate amount of the debits (less any
credits) brought into account by the company for tax purposes in
respect of the loan relationship over the period for which the
company has been party to it is less than would otherwise have been
the case,
40

the balance may be brought into account for the purposes of Chapter 2 of
Part 4 of FA 1996 (loan relationships) as a debit in the company’s next period
of account.
      (3)
Where at the end of the last period of account of a company before sub-
paragraph (1)(b) has effect—
45
(a)
the company has ceased to be a party to a loan relationship, and

Finance Bill
Schedule 7 — Accounting practice and related matters
Part 1 — Bad debts and related matters
177

(b)
the effect of paragraph 9 (or a corresponding earlier enactment) is
that part of the loss arising has not been brought into account for tax
purposes,

nothing in this paragraph prevents any debit that could have been brought
into account for the purposes of Chapter 2 of Part 4 of FA 1996 (loan
5
relationships) under paragraph 9(4) and (5) in a subsequent period of
account from being so brought into account.
FA 1997
18    (1)
Schedule 12 to FA 1997 (leasing arrangements: finance leases and loans) is
amended as follows.
10
      (2)
In paragraph 9(7) (relief for bad debts etc: cumulative accountancy rental
excess), for the definition of “bad debt deduction” substitute—
““bad debt deduction”, in relation to a period of account, means the
aggregate of any deductions falling to be made for accounting
purposes for that period by way of impairment loss in respect of
15
rents from the lease of the asset;”.
      (3)
In paragraph 10(7) (relief for bad debts etc: cumulative normal rental excess),
for the definition of “bad debt deduction” substitute—
““bad debt deduction”, in relation to a period of account, means the
aggregate of any deductions falling to be made for accounting
20
purposes for that period by way of impairment loss in respect of
rents from the lease of the asset;”.
Schedule 26 to FA 2002
19
In paragraph 22(5) of Schedule 26 to FA 2002 (derivative contracts release of
liability) for “relevant arrangement or compromise within the meaning
25
given by section 74(2) of the Taxes Act 1988” substitute “statutory insolvency
arrangement”.
Schedule 29 to FA 2002
20    (1)
In Schedule 29 to FA 2002 (gains and losses of a company from intangible
fixed assets), paragraph 115 (bad debts etc) is amended as follows.
30
      (2)
For sub-paragraph (1) substitute—
    “(1)
No debit may be brought into account for the purposes of this
Schedule in respect of a debt owed to the company, except—
(a)
by way of impairment loss, or
(b)
to the extent that the debt is released as part of a statutory
35
insolvency arrangement.”.
      (3)
Omit sub-paragraph (2).
      (4)
In sub-paragraph (3) for “sub-paragraph (1)(c)” substitute “sub-paragraph
(1)(b)”.
      (5)
After sub-paragraph (5) insert—
40
    “(6)
In this paragraph “debt” includes an obligation or liability that
falls to be discharged otherwise than by the payment of money.”.

Finance Bill
Schedule 7 — Accounting practice and related matters
Part 2 — Other provisions connected with accounting practice
178

Part 2
Other provisions connected with accounting practice
ICTA
21
In section 43A of ICTA (rent factoring: meaning of “finance agreement”), in
subsection (3) (reference to consolidated group accounts), omit paragraphs
5
(a) and (b) and the word “and” preceding paragraph (a).
22
In section 75A(10) of ICTA (accounting period to which expenses of
management are referable)—
(a)
in paragraph (a) after “profit and loss account” insert “or income
statement”, and
10
(b)
in paragraph (b), after “gains and losses” insert “, statement of
changes in equity”.
23
In section 501A of ICTA (supplementary charge in respect of ring-fence
trades), in subsection (10) (reference to group accounts) for paragraph (b)
substitute—
15
“(b)
are drawn up in accordance with generally accepted
accounting practice.”.
24    (1)
Section 747A of ICTA (special rule requiring chargeable profits of controlled
foreign companies to be computed in currency of accounts of company’s
first relevant accounting period) shall cease to have effect.
20
      (2)
This amendment has effect in relation to accounting periods beginning on or
after 16th March 2005.
25
Section 836A of ICTA (meaning of generally accepted accounting practice)
shall cease to have effect.
FA 1996
25
26    (1)
Section 85B of FA 1996 (loan relationships: amounts recognised in
determining company’s profit or loss) is amended as follows.
      (2)
In subsection (1)(a) after “profit and loss account” insert “or income
statement”.
      (3)
For subsection (2) substitute—
30
“(2)
An amount that in accordance with generally accepted accounting
practice is shown as a prior period adjustment in any such statement
as is mentioned in subsection (1) shall be brought into account for the
purposes of this Chapter in computing the company’s profits and
losses for the period to which the statement relates.
35

This does not apply to an amount recognised for accounting
purposes by way of correction of a fundamental error.”.
      (4)
In subsection (3)—
(a)
in paragraph (a) after “subsection (1)” insert “or (2)”, and
(b)
in paragraph (b) for “subsection (1) substitute “that subsection”.
40
      (5)
In subsection (4) after “subsection (1)” insert “or (2)”.

Finance Bill
Schedule 7 — Accounting practice and related matters
Part 2 — Other provisions connected with accounting practice
179

27    (1)
Section 94 of FA 1996 (loan relationships: treatment of indexed gilt-edged
securities) shall be deemed not to have been repealed by paragraph 12 of
Schedule 10 to FA 2004.

Paragraph 12(3) of Schedule 25 to FA 2002 (which amended that section)
shall also be deemed not to have been repealed by Division (6) of Part 2 of
5
Schedule 42 to FA 2004.
      (2)
That section is, instead, amended as follows.
      (3)
For subsections (1) to (3A) substitute—
“(1)
In the case of a loan relationship represented by an index-linked gilt-
edged security—
10
(a)
the amounts to be brought into account for the purposes of
this Chapter must be determined using fair value accounting,
and
(b)
the following adjustment shall be made in computing those
amounts.
15
(2)
The adjustment shall be made wherever—
(a)
those amounts fall to be determined by reference to the value
of the security at two different times, and
(b)
there is a change in the retail prices index between those
times.
20
(3)
The adjustment is made to the carrying value of the security at the
earlier time and is to increase or, as the case may be, reduce it by the
same percentage as the percentage increase or reduction in the retail
prices index between the earlier and the later time.”.
28    (1)
Section 94A of FA 1996 (loan relationships with embedded derivatives) is
25
amended as follows.
      (2)
In subsection (1) for “is permitted or required in accordance with generally
accepted accounting practice to treat” substitute “in accordance with
generally accepted accounting practice treats”.
      (3)
Where—
30
(a)
immediately before the end of its last period of account beginning
before 1st January 2005 a company holds one or more assets to which
section 92 or 93 of FA 1996 applies, and
(b)
section 94A of FA 1996 does not otherwise apply in relation to those
assets in the company’s first period of account beginning on or after
35
1st January 2005,

the company may elect that section 94A shall apply in relation to those
assets.
      (4)
Any such election—
(a)
must be made to the Inland Revenue in writing on or before 31st July
40
2005,
(b)
must apply to all the assets held by the company as mentioned in
sub-paragraph (3), and
(c)
is irrevocable.
29
In section 103 of FA 1996 (interpretation), after subsection (1A) (meaning of
45

Finance Bill
Schedule 7 — Accounting practice and related matters
Part 2 — Other provisions connected with accounting practice
180

“exchange gains or losses”) insert—
“(1AA)
In a case where fair value accounting is used the valuation referred
to in subsection (1A) is the valuation that would be given by an
amortised cost basis of accounting.”.
30
In Schedule 9 to FA 1996 (loan relationships: special computational
5
provisions), after paragraph 14 (debits and credits treated as relating to
capital expenditure) insert—
“Debits and credits recognised in equity or shareholders’ funds
14A
Where in accordance with generally accepted accounting practice
a debit or credit for a period in respect of a loan relationship of a
10
company—
(a)
is recognised in equity or shareholders’ funds, and
(b)
is not recognised in any of the statements mentioned in
section 85B(1),

the debit or credit shall be brought into account for that period for
15
the purposes of this Chapter in the same way as a debit or credit
that, in accordance with generally accepted accounting practice, is
brought into account in determining the company’s profit or loss
for that period.”.
31    (1)
Paragraph 19A of Schedule 9 to FA 1996 (loan relationships: adjustment on
20
change of accounting policy) is amended as follows.
      (2)
In sub-paragraph (4), after “means” insert “, subject to sub-paragraph (4B),”.
      (3)
After that sub-paragraph insert—
   “(4A)
For the purposes of this paragraph the “carrying value” of an asset
or liability includes amounts recognised for accounting purposes
25
in relation to the loan relationship in respect of—
(a)
accrued amounts;
(b)
amounts paid or received in advance;
(c)
impairment losses (including provisions for bad or
doubtful debts).
30
     (4B)
In determining the profits, gains and losses to be recognised in
determining the carrying value of the asset or liability for the
purposes of this paragraph, the following provisions—
(a)
section 87(2) (accounting method where parties have a
connection),
35
(b)
section 88A(4) (accounting method where rate of interest is
reset),
(c)
section 94 (loan relationships: treatment of indexed gilt-
edged securities),
(d)
section 94A(2) (loan relationships with embedded
40
derivatives),
(e)
section 96(2) (special rules for certain gilts);
(f)
section 154(6) (FOTRA securities: certain amounts not to be
brought into account), and
(g)
paragraphs 1, 1A, 2, 6, 12 and 18 of this Schedule (special
45
computational provisions),

Finance Bill
Schedule 7 — Accounting practice and related matters
Part 2 — Other provisions connected with accounting practice
181


apply as they apply for the purposes of determining the credits
and debits to be brought into account under this Chapter.
     (4C)
Where—
(a)
a company has ceased to be a party to a loan relationship,
(b)
section 103(6) (credits and debits to be brought into
5
account in respect of profits, gains and losses arising in the
cessation period) applied to the cessation, and
(c)
there is a difference between—
(i)
the amount outstanding in respect of the loan
relationship at the end of the earlier period, and
10
(ii)
the amount outstanding in respect of the loan
relationship at the beginning of the later period,

a debit or credit (as the case may be) corresponding to that
difference shall be brought into account for the purposes of this
Chapter at the beginning of the later period.
15
     (4D)
In sub-paragraph (4C), “the amount outstanding”, in respect of a
loan relationship, means so much of the amount recognised as
deferred income or deferred loss in the company’s balance sheet,
in accordance with generally accepted accounting practice, in
respect of the profits, gains or losses that arose from that
20
relationship or a related transaction in the cessation period (within
the meaning of section 103(6)) as has not been represented by
credits or debits brought into account under this Chapter.”.
      (4)
In sub-paragraph (5) after “sub-paragraph (3)” insert “or (4C)”.
      (5)
Omit sub-paragraph (6).
25
FA 1997
32
In Schedule 12 to FA 1997 (leasing arrangements: finance leases and loans),
in paragraph 30(1) (interpretation) omit the definitions of “consolidated
group accounts”, “group of companies” and “member” in relation to a group
of companies.
30
CAA 2001
33
In section 219 of CAA 2001 (finance leases), in subsection (3) (reference to
group accounts) for paragraph (b) substitute—
“(b)
are drawn up in accordance with generally accepted
accounting practice.”.
35
Schedule 26 to FA 2002
34    (1)
Paragraph 17B of Schedule 26 to FA 2002 (derivative contracts: amounts
recognised in determining company’s profit or loss), is amended as follows.
      (2)
In sub-paragraph (1)(a) after “profit and loss account” insert “or income
statement”.
40
      (3)
For sub-paragraph (2) substitute—
    “(2)
An amount that in accordance with generally accepted accounting
practice is shown as a prior period adjustment in any such