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Finance (No. 2) Bill


Finance (No. 2) Bill
Schedule 4 — Accounting practice and related matters
Part 1 — Bad debts and related matters

105

 

      (2)  

In subsection (1) for “relevant arrangement or compromise” substitute

“statutory insolvency arrangement”.

      (3)  

Omit subsection (2).

5     (1)  

Section 103 of ICTA (receipts after discontinuance) is amended as follows.

      (2)  

In subsection (4)(b) for “relevant arrangement or compromise” substitute

5

“statutory insolvency arrangement”.

      (3)  

Omit subsection (4A).

      (4)  

In subsection (5) as it had effect before ITTOIA 2005 for “a deduction has

been allowed in respect of that sum under section 74(j)” substitute “a

deduction has been made for tax purposes in respect of an impairment loss

10

or a release of liability”.

      (5)  

In subsection (5) as amended by ITTOIA 2005 for “a deduction has been

allowed in respect of that sum under section 74(j) or section 35 of ITTOIA

2005” substitute “a deduction has been made for tax purposes in respect of

an impairment loss or a release of liability”.

15

6     (1)  

Section 109A of ICTA (relief for post-cessation expenditure) is amended as

follows.

      (2)  

In subsection (4) for “relevant arrangement or compromise (within the

meaning of section 74)” substitute “statutory insolvency arrangement”.

      (3)  

After subsection (4A) insert—

20

“(4B)   

In subsections (4) and (4A) “debt” includes an obligation or liability

that falls to be discharged otherwise than by the payment of money.

   

The references to a debt being bad shall be read accordingly.”.

7          

In section 799 of ICTA (double taxation relief: computation of underlying

loss), in subsection (6)(b) after “bad debts” insert “, impairment losses”.

25

8          

In section 834(1) of ICTA (interpretation of the Corporation Tax Acts), at the

appropriate place insert—

““statutory insolvency arrangement” means—

(a)   

a voluntary arrangement that has taken effect under

or as a result of the Insolvency Act 1986, Schedule 4 or

30

5 to the Bankruptcy (Scotland) Act 1985 or the

Insolvency (Northern Ireland) Order 1989,

(b)   

a compromise or arrangement that has taken effect

under section 425 of the Companies Act 1985 or

Article 418 of the Companies (Northern Ireland)

35

Order 1986, or

(c)   

any arrangement or compromise of a kind

corresponding to any of those mentioned in

paragraph (a) or (b) above that has taken effect under

or by virtue of the law of a country or territory outside

40

the United Kingdom;”.

FA 1996

9     (1)  

Section 100 of FA 1996 (interest, and exchange gains and losses, on debts etc

not arising from the lending of money) is amended as follows.

 

 

Finance (No. 2) Bill
Schedule 4 — Accounting practice and related matters
Part 1 — Bad debts and related matters

106

 

      (2)  

For the heading substitute “Money debts etc not arising from the lending

of money”.

      (3)  

In subsection (1)(c) (money debts to which the section applies), after sub-

paragraph (ii) insert—

   

“or

5

(iii)   

in respect of which a payment would fall to be

brought into account for the purposes of corporation

tax as a receipt of a trade, Schedule A business or

overseas property business carried on by the

company, and in relation to which an impairment loss

10

(or a credit in respect of the reversal of an impairment

loss) arises to the company;”.

      (4)  

In subsection (2) for paragraphs (a) and (b) substitute—

“(a)   

this Chapter has effect in relation to the matters mentioned in

subsection (1)(c) above as it has effect in relation to such

15

matters arising under or in relation to a loan relationship, but

(b)   

the only credits or debits to be brought into account for the

purposes of this Chapter in respect of the relationship are

those relating to those matters;”.

      (5)  

After subsection (13) add—

20

“(14)   

This section does not apply to a debt in respect of which profits, gains

or losses (if any) fall to be brought into account under—

(a)   

Schedule 26 to the Finance Act 2002 (derivative contracts), or

(b)   

Schedule 29 to that Act (gains and losses from intangible

fixed assets).”.

25

10    (1)  

In Schedule 9 to FA 1996 (loan relationships: special computational

provisions), before paragraph 5 insert—

“Deemed release of liability on impaired debt becoming held by connected company

4A    (1)  

This paragraph applies—

(a)   

in the case specified in sub-paragraph (2), subject to the

30

exception in sub-paragraph (3); and

(b)   

in the case specified in sub-paragraph (4).

      (2)  

The first case is where—

(a)   

a company (“the debtor company”) is party as debtor to a

loan relationship,

35

(b)   

another company (“the creditor company”) becomes party

as creditor to the loan relationship,

(c)   

the debtor company and the creditor company—

(i)   

are connected immediately before the latter

becomes party to the loan relationship, or

40

(ii)   

become connected as a result of its doing so, and

(d)   

the amount remaining payable under the debtor

relationship at the time the creditor company becomes

party to the loan relationship exceeds the amount or value

of any consideration given by the creditor company for its

45

rights under the loan relationship.

 

 

Finance (No. 2) Bill
Schedule 4 — Accounting practice and related matters
Part 1 — Bad debts and related matters

107

 

      (3)  

The exception to the first case is where—

(a)   

the creditor company acquires its rights under the loan

relationship under an arm’s length transaction,

(b)   

there was no connection between the creditor company

and the person from whom it acquired the asset in the

5

period of account in which it acquired those rights, and

(c)   

there had been no connection between the creditor

company and the debtor company at any time in the

period—

(i)   

beginning four years before the date on which the

10

creditor company acquired those rights, and

(ii)   

ending twelve months before that date.

      (4)  

The second case is where—

(a)   

a company (“the debtor company”) is party as debtor to a

loan relationship,

15

(b)   

another company (“the creditor company”) that—

(i)   

is party to the loan relationship as creditor, and

(ii)   

is not connected with the debtor company,

   

becomes connected with the debtor company, and

(c)   

the amount remaining payable under the debtor

20

relationship at the time the companies become connected

exceeds its value.

           

Its “value” means the amount that would have been its carrying

value in the accounts of the creditor company if a period of

account had ended immediately before the companies became

25

connected.

      (5)  

Where this paragraph applies there is deemed to be a release by

the creditor company of its rights under the loan relationship.

      (6)  

In the first case the release is deemed to be of the amount of the

excess referred to in sub-paragraph (2)(d) and to take place when

30

the creditor company acquires its rights under the loan

relationship.

      (7)  

In the second case the release is deemed to be of the amount of the

excess referred to in sub-paragraph (4)(c) and to take place when

the creditor company becomes connected with the debtor

35

company.”.

      (2)  

The amendment in sub-paragraph (1) has effect where the deemed release

occurs on or after 16th March 2005.

11    (1)  

Paragraph 5 of Schedule 9 to FA 1996 (release of liability under debtor

relationship) is amended as follows.

40

      (2)  

In the heading, at the end add “: cases in which credit need not be brought into

account”.

      (3)  

In sub-paragraph (3) for “four” substitute “five”.

      (4)  

In sub-paragraph (4) for “relevant arrangement or compromise within the

meaning given by section 74(2) of the Taxes Act 1988” substitute “statutory

45

insolvency arrangement”.

 

 

Finance (No. 2) Bill
Schedule 4 — Accounting practice and related matters
Part 1 — Bad debts and related matters

108

 

      (5)  

In sub-paragraph (5) at the end add—

        

“This condition does not apply in the case of a credit required to

be brought into account by virtue of paragraph 4A (deemed

release on impaired debt becoming held by connected

company).”.

5

      (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—

10

“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

15

(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.”.

20

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)”.

25

      (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

30

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

35

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

40

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.

 

 

Finance (No. 2) Bill
Schedule 4 — Accounting practice and related matters
Part 1 — Bad debts and related matters

109

 

14         

Omit paragraph 6B of Schedule 9 to FA 1996 (impairment losses: companies

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

5

(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

10

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

15

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

20

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

25

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.”.

30

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.).

35

      (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)

40

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,

45

 

 

Finance (No. 2) Bill
Schedule 4 — Accounting practice and related matters
Part 1 — Bad debts and related matters

110

 

           

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—

5

(a)   

the company has ceased to be a party to a loan relationship, and

(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

10

into account for the purposes of Chapter 2 of Part 4 of FA 1996 (loan

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

15

amended as follows.

      (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

20

purposes for that period by way of impairment loss in respect of

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

25

aggregate of any deductions falling to be made for accounting

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

30

liability) for “relevant arrangement or compromise within the meaning

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

35

fixed assets), paragraph 115 (bad debts etc) is amended as follows.

      (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

40

(b)   

to the extent that the debt is released as part of a statutory

insolvency arrangement.”.

      (3)  

Omit sub-paragraph (2).

 

 

Finance (No. 2) Bill
Schedule 4 — Accounting practice and related matters
Part 2 — Other provisions connected with accounting practice

111

 

      (4)  

In sub-paragraph (3) for “sub-paragraph (1)(c)” substitute “sub-paragraph

(1)(b)”.

      (5)  

After sub-paragraph (5) insert—

    “(6)  

In this paragraph “debt” includes an obligation or liability that

falls to be discharged otherwise than by the payment of money.”.

5

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

10

(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

15

(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—

20

“(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.

25

      (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

30

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—

35

“(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.

40

   

This does not apply to an amount recognised for accounting

purposes by way of correction of a fundamental error.”.

 

 

 
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