Finance Bill

House of Commons

Session 2004 - 05
Internet Publications
Other Bills before Parliament

Finance Bill

Finance Bill
Schedule 7 — Accounting practice and related matters
Part 2 — Other provisions connected with accounting practice
182

statement as is mentioned in sub-paragraph (1) shall be brought
into account for the purposes of this Schedule in computing the
company’s profits and losses for the period to which the statement
relates.

This does not apply to an amount recognised for accounting
5
purposes by way of correction of a fundamental error.”.
35
After paragraph 25 of Schedule 26 to FA 2002 (debits and credits treated as
relating to capital expenditure) insert—
“Debits and credits recognised in equity or shareholders’ funds
25A
Where in accordance with generally accepted accounting practice
10
a debit or credit for a period in respect of a derivative contract of a
company—
(a)
is recognised in equity or shareholders’ funds, and
(b)
is not recognised in any of the statements mentioned in
section 85B(1),
15

the debit or credit shall be brought into account for that period for
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.”.
20
36
In paragraphs 38(1) and (3) and 38A(1) and (3) of Schedule 26 to FA 2002, as
inserted by Schedule 10 to FA 2004, for “creditor relationship” substitute
“derivative contract”.

These amendments shall be deemed always to have had effect.
37
In paragraph 54 of Schedule 26 to FA 2002 (derivative contracts: general
25
interpretation), after sub-paragraph (2) (meaning of “exchange gains or
losses”) insert—
   “(2A)
In a case where fair value accounting is used the valuation referred
to in sub-paragraph (2) is the valuation that would be given by an
amortised cost basis of accounting.”.
30
Schedule 29 to FA 2002
38    (1)
Paragraph 6 of Schedule 29 to FA 2002 (gains and losses of a company from
intangible fixed assets: reference to consolidated group accounts) is
amended as follows.
      (2)
Omit sub-paragraph (2).
35
      (3)
After that sub-paragraph insert—
   “(2A)
This paragraph does not apply if the consolidated group
accounts—
(a)
are drawn up using a different accounting framework
from that used for the company’s individual accounts, and
40
(b)
as a result, are prepared on a basis that, in relation to the
matters mentioned in sub-paragraph (1), substantially
diverges from the basis used in the company’s individual
accounts.”.

Finance Bill
Schedule 7 — Accounting practice and related matters
Part 2 — Other provisions connected with accounting practice
183

39
In paragraph 8(1) of Schedule 29 to FA 2002 for “a company’s profit and loss
account” substitute “determining a company’s profit or loss”.
40
In paragraphs 9(1), 12(1), 14(1), 16(1), 17(1), 26(1)(a), 103(2) and (3)(a) of
Schedule 29 to FA 2002, for “the company’s profit and loss account”
substitute “determining the company’s profit or loss”.
5
41
In paragraph 13(1)(a) of Schedule 29 to FA 2002 for “the profit and loss
account” substitute “determining the company’s profit or loss”.
42
In paragraphs 27 and 28 of Schedule 29 to FA 2002 (intangible fixed assets:
calculation of tax written down value, for sub-paragraph (3) substitute—
    “(3)
This paragraph has effect subject to—
10
paragraph 29 in the case of an asset that has been the subject
of a part realisation, and
Part 13A of this Schedule in the case of an asset that has been
subject to adjustment on a change of accounting policy.”.
43
In paragraph 29 of Schedule 29 to FA 2002 (intangible fixed assets: effect of
15
part realisation), after sub-paragraph (4) insert—
    “(5)
On a subsequent change of accounting policy affecting the asset,
the provisions of Part 13A of this Schedule apply.”.
44
In Part 7 of Schedule 29 to FA 2002 (intangible fixed assets: roll-over relief in
case of realisation and reinvestment), after paragraph 42 insert—
20
“References to cost of asset where asset affected by change of accounting policy
42A   (1)
In the case of an asset to which Part 13A of this Schedule has
applied (adjustment on change of accounting policy) the
references in this Part to the cost of the asset shall be read as
follows.
25
      (2)
Where paragraph 116B applied (change of accounting value) the
references are unaffected.
      (3)
Where paragraph 116C or 116D applied (changes involving
disaggregation of asset) the references to the cost of the asset shall
be read as references to the appropriate proportion of that cost.
30

The appropriate proportion is determined by applying to the cost
of the asset the same fraction as is applied by paragraph 116C(5)
or 116D(3), as the case may be, to determine the tax written down
value of the asset after the change.
      (4)
References in this paragraph to paragraphs 116B, 116C and 116D
35
include references to those provisions as applied by paragraph
116E.”.
45
For paragraph 116A of Schedule 29 to FA 2002 (intangible fixed assets:

Finance Bill
Schedule 7 — Accounting practice and related matters
Part 2 — Other provisions connected with accounting practice
184

adjustment on change of accounting policy) substitute—
“Part 13A
Adjustment on change of accounting policy
Introduction
116A  (1)
This Part of this Schedule applies where—
5
(a)
there is a change of accounting policy in drawing up a
company’s accounts from one period of account (“the
earlier period”) to the next (“the later period”), and
(b)
the approach in each of those periods accords with the law
and practice applicable in relation to that period.
10
      (2)
It applies, in particular, where—
(a)
the company prepares accounts for the earlier period in
accordance with UK generally accepted accounting
practice and for the later period in accordance with
international accounting standards, or
15
(b)
the company prepares accounts for the earlier period in
accordance with international accounting standards and
for the later period in accordance with UK generally
accepted accounting practice.
Change of accounting policy involving change of value
20
116B  (1)
If as a result of the change of accounting policy there is a difference
between—
(a)
the accounting value of an intangible fixed asset of the
company at the end of the earlier period, and
(b)
the accounting value of that asset at the beginning of the
25
later period,

a corresponding debit or credit (as the case may be) shall be
brought into account for tax purposes in the later period.
      (2)
Any such debit or credit is treated as arising at the beginning of the
later period.
30
      (3)
The amount of the debit or credit to be brought into account for tax
purposes is:

where—
Accounting Difference is the amount of the difference
specified in sub-paragraph (1);
35
Tax Value is the tax written down value of the asset at the end
of the earlier period; and
Accounting Value is the accounting value of the asset at the
end of that period.
      (4)
The tax written down value of the asset at the beginning of the
40
later period shall be taken to be the tax written down value of the
asset at the end of the earlier period, reduced by the amount of the

Finance Bill
Schedule 7 — Accounting practice and related matters
Part 2 — Other provisions connected with accounting practice
185

debit or (as the case may be) increased by the amount of the credit
brought into account for tax purposes under sub-paragraph (3).
      (5)
Subsequently—
(a)
the cost recognised for tax purposes shall be taken to be the
tax written down value given by sub-paragraph (4),
5
together with the cost recognised for tax purposes of any
subsequent expenditure on the asset that is capitalised for
accounting purposes; and
(b)
the tax written down value shall be determined taking
account only of subsequent debits and credits.
10
      (6)
This paragraph does not apply to an asset in respect of which an
election has been made under paragraph 10 (election for writing
down at fixed-rate).
      (7)
This paragraph has effect subject to—
paragraph 116F (cap on credit to be brought into account on
15
change of accounting policy), and
paragraph 116G (debits or credits brought into account under
other provisions).
Change of accounting policy involving disaggregation
116C  (1)
This paragraph applies where the change of accounting policy
20
results in an intangible fixed asset of the company that was treated
as one asset (“the original asset”) in the earlier period being treated
as two or more assets (“the resulting assets”) in the later period.
      (2)
If there is a difference between—
(a)
the accounting value of the original asset at the end of the
25
earlier period, and
(b)
the aggregate accounting value of the resulting assets at
the beginning of the later period,

a corresponding debit or credit (as the case may be) shall be
brought into account for tax purposes in the later period.
30
      (3)
Any such debit or credit is treated as arising at the beginning of the
later period.
      (4)
The amount of the debit or credit to be brought into account for tax
purposes is:

where—
35
Accounting Difference is the amount of the difference
specified in sub-paragraph (2),
Old Tax Value is the tax written-down value of the original
asset at the end of the earlier period, and
Old Accounting Value is the accounting value of that asset at
40
the end of that period.
      (5)
The tax written down value of each resulting asset at the
beginning of the later period is given by:

Finance Bill
Schedule 7 — Accounting practice and related matters
Part 2 — Other provisions connected with accounting practice
186


where—
Adjusted Old Tax Value is the tax written down value of the
original asset at the end of the earlier period, reduced by
the amount of the debit or (as the case may be) increased
by the amount of the credit brought into account for tax
5
purposes under sub-paragraph (4),
New Accounting Value is the accounting value of the asset in
question at the beginning of the later period, and
Aggregate New Accounting Value is the aggregate of the
accounting values of all the resulting assets at the
10
beginning of that period.
      (6)
Subsequently for each resulting asset—
(a)
the cost recognised for tax purposes shall be taken to be the
tax written down value given by sub-paragraph (5) above,
together with the cost recognised for tax purposes of any
15
subsequent expenditure on the asset that is capitalised for
accounting purposes; and
(b)
the tax written down value shall be determined taking
account only of subsequent debits and credits.
      (7)
This paragraph does not apply if an election under paragraph 10
20
(election for writing down at fixed-rate)—
(a)
has been or is subsequently made in respect of the original
asset (see paragraph 116D), or
(b)
is subsequently made in respect of any of the resulting
assets (see paragraph 116E)
25
      (8)
This paragraph has effect subject to—
paragraph 116F (cap on credit to be brought into account on
change of accounting policy), and
paragraph 116G (debits or credits brought into account under
other provisions).
30
Change of accounting policy involving disaggregation: original asset subject to fixed
rate writing down
116D  (1)
This paragraph applies where—
(a)
the change of accounting policy results in an intangible
fixed asset of the company that was treated as one asset
35
(“the original asset”) in the earlier period being treated as
two or more assets (“the resulting assets”) in the later
period, and
(b)
an election under paragraph 10 (election for writing down
at fixed-rate) has been or is subsequently made in respect
40
of the original asset.
      (2)
That election has effect—
(a)
in relation to the original asset, for periods up to and
including the earlier period, and

Finance Bill
Schedule 7 — Accounting practice and related matters
Part 2 — Other provisions connected with accounting practice
187

(b)
in relation to each of the resulting assets, for the later
period and subsequent periods.
      (3)
The tax written down value of each resulting asset at the
beginning of the later period is given by:

where—
5
Old Tax Value is the tax written down value of the original
asset at the end of the earlier period,
New Accounting Value is the accounting value of the asset in
question at the beginning of the later period, and
Aggregate New Accounting Value is the aggregate of the
10
accounting values of all the resulting assets at the
beginning of that period.
      (4)
Subsequently for each resulting asset—
(a)
the cost recognised for tax purposes shall be taken to be the
tax written down value given by sub-paragraph (3) above,
15
together with the cost recognised for tax purposes of any
subsequent expenditure on the asset that is capitalised for
accounting purposes; and
(b)
the tax written down value shall be determined taking
account only of subsequent debits and credits.
20
Change of accounting policy involving disaggregation: election for fixed rate writing
down in relation to resulting asset
116E  (1)
This paragraph applies where—
(a)
the change of accounting policy results in an intangible
fixed asset of the company that was treated as one asset
25
(“the original asset”) in the earlier period being treated as
two or more assets (“the resulting assets”) in the later
period, and
(b)
no election under paragraph 10 (election for writing down
at fixed-rate) has been or is subsequently made in respect
30
of the original asset.
      (2)
An election under that paragraph may be made in respect of any
of the resulting assets, provided it is made within the period
during which such an election could have been made in relation to
the original asset.
35
      (3)
The effect of the election is that—
(a)
the original asset is treated as if it had at all material times
consisted of as many assets (“notional original assets”) as
there are resulting assets,
(b)
each notional original asset is taken to be the same asset as
40
one of the resulting assets (its “corresponding resulting
asset”),
(c)
there is attributed to each notional original asset the
appropriate proportion, ascertained by reference to its
corresponding resulting asset (see sub-paragraph (4)), of
45

Finance Bill
Schedule 7 — Accounting practice and related matters
Part 2 — Other provisions connected with accounting practice
188

every amount falling to be taken into account in relation to
the original asset, and
(d)
the provisions of this Schedule apply in relation to each of
the notional original assets and its corresponding resulting
asset accordingly.
5
      (4)
The appropriate proportion in relation to each resulting asset is:

where—
New Accounting Value is the accounting value of the asset at
the beginning of the later period, and
Aggregate New Accounting Value is the aggregate of the
10
accounting values of all the resulting assets at the
beginning of that period.
Cap on credit to be brought into account on change of accounting policy
116F  (1)
The amount of any credit to be brought into account for tax
purposes under paragraph 116B or 116C (assets subject to writing
15
down on accounting basis) is limited to the net aggregate amount
of relevant tax debits previously brought into account.
      (2)
Where the credit is to be brought into account under paragraph
116B (change of value), the net aggregate amount of relevant tax
debits previously brought into account is:
20

where—
Previous Debits is the total amount of debits previously
brought into account for tax purposes in respect of the
asset, and
Previous Credits is the total amount of credits previously
25
brought into account for tax purposes in respect of the
asset.
      (3)
Where the credit is to be brought into account under paragraph
116C (disaggregation), the net aggregate amount of relevant tax
debits previously brought into account is:
30

where—
Previous Debits is the total amount of debits previously
brought into account for tax purposes in respect of the
original asset at the end of the earlier period, and
Previous Credits is the total amount of credits previously
35
brought into account for tax purposes in respect of that
asset.