Corporation Tax Bill

House of Commons

Session 2008 - 09
Internet Publications
Other Bills before Parliament

Corporation Tax Bill

Corporation Tax Bill
Part 5 — Loan Relationships
Chapter 3 — The credits and debits to be brought into account: general
135

General principles about the bringing into account of credits and debits
307
General principles about the bringing into account of credits and debits
(1)
This Part operates by reference to the accounts of companies and amounts
recognised for accounting purposes.
(2)
The general rule is that the amounts to be brought into account by a company
5
as credits and debits for any period for the purposes of this Part are those that
are recognised in determining the company’s profit or loss for the period in
accordance with generally accepted accounting practice.
(3)
The credits and debits to be brought into account in respect of a company’s
loan relationships are the amounts that, when taken together, fairly represent
10
for the accounting period in question—
(a)
all profits and losses of the company that arise to it from its loan
relationships and related transactions (excluding interest or expenses),
(b)
all interest under those relationships, and
(c)
all expenses incurred by the company under or for the purposes of
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those relationships and transactions.
(4)
Expenses are only treated as incurred as mentioned in subsection (3)(c) if they
are incurred directly—
(a)
in bringing any of the loan relationships into existence,
(b)
in entering into or giving effect to any of the related transactions,
20
(c)
in making payments under any of those relationships or as a result of
any of those transactions, or
(d)
in taking steps to ensure the receipt of payments under any of those
relationships or in accordance with any of those transactions.
(5)
For the treatment of pre-loan relationship and abortive expenses, see section
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329.
(6)
Subsection (2) is subject to the provisions of this Part and, in particular,
subsection (3).
Amounts recognised in determining a company’s profit or loss
308
Amounts recognised in determining a company’s profit or loss
30
(1)
References in this Part to an amount recognised in determining a company’s
profit or loss for a period are references to an amount recognised in—
(a)
the company’s profit and loss account, income statement or statement
of comprehensive income for that period,
(b)
the company’s statement of total recognised gains and losses,
35
statement of recognised income and expense, statement of changes in
equity or statement of income and retained earnings for that period, or
(c)
any other statement of items taken into account in calculating the
company’s profits and losses for that period.
(2)
If, in accordance with generally accepted accounting practice, an amount is
40
shown as a prior period adjustment in any statement within subsection (1), it
must be brought into account for the purposes of this Part in calculating the
company’s profits and losses for the period to which the statement relates.

Corporation Tax Bill
Part 5 — Loan Relationships
Chapter 3 — The credits and debits to be brought into account: general
136

(3)
Subsection (2) does not apply to an amount recognised for accounting
purposes by way of correction of a fundamental error.
309
Companies without GAAP-compliant accounts
(1)
If a company—
(a)
draws up accounts which are not GAAP-compliant accounts, or
5
(b)
does not draw up accounts at all,

this Part applies as if GAAP-compliant accounts had been drawn up.
(2)
Accordingly, references in this Part to amounts recognised for accounting
purposes are references to the amounts that would have been recognised if
GAAP-compliant accounts had been drawn up for the period of account in
10
question and any relevant earlier period.
(3)
For this purpose a period of account is relevant to a later period if the accounts
for the later period rely to any extent on amounts derived from the earlier
period.
(4)
In this section “GAAP-compliant accounts” means accounts drawn up in
15
accordance with generally accepted accounting practice.
310
Power to make regulations about recognised amounts
(1)
The Treasury may by regulations—
(a)
make provision excluding from section 308(1) or (2) amounts of a
specified description, and
20
(b)
make provision for or in connection with bringing into account in
specified circumstances amounts in relation to which section 308(1) or
(2) does not have effect as a result of regulations under paragraph (a).
(2)
The regulations may provide that section 308(1) or (2) does not apply to
specified amounts in a period of account so far as they derive from or otherwise
25
relate to amounts brought into account in a specified way in a previous period
of account.
(3)
The regulations may—
(a)
make different provision for different cases, and
(b)
make provision subject to an election or to other specified conditions.
30
(4)
The regulations may apply to periods of account beginning before they are
made, but not earlier than the beginning of the calendar year in which they are
made.
(5)
The power to make regulations under this section does not apply to exchange
gains or losses (but see section 328(4) to (7)).
35
311
Amounts not fully recognised for accounting purposes: introduction
(1)
Section 312 applies for the purpose of determining the credits and debits which
a company is to bring into account for a period for the purposes of this Part in
the following case.
(2)
The case is where—
40
(a)
the company is, or is treated as, a party to a creditor relationship in the
period,

Corporation Tax Bill
Part 5 — Loan Relationships
Chapter 3 — The credits and debits to be brought into account: general
137

(b)
an amount is not fully recognised for the period in respect of the
relationship as a result of the application of generally accepted
accounting practice in relation to the relationship (see subsection (6)),
and
(c)
condition A or B is met.
5
(3)
Condition A is that—
(a)
the company is or is treated as a party to a debtor relationship in the
period, and
(b)
an amount is not fully recognised for the period in respect of the debtor
relationship as a result of the application of generally accepted
10
accounting practice in relation to the relationship.
(4)
Condition B is that—
(a)
an amount (a “relevant capital contribution”) has at any time been
contributed to the company which forms part of its capital for the
period, and
15
(b)
an amount is not fully recognised for the period in respect of the
relevant capital contribution as a result of the application of generally
accepted accounting practice in relation to the contribution.
(5)
It does not matter for the purposes of subsection (4) whether the contribution
forms part of the company’s share capital or other capital for the period.
20
(6)
For the purposes of this section an amount is not fully recognised for a period
in respect of a relationship of a company or a relevant capital contribution to it
if—
(a)
no amount in respect of the relationship or contribution is recognised
in determining its profit or loss for the period, or
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(b)
an amount is so recognised in respect of only part of the relationship or
contribution.
312
Determination of credits and debits where amounts not fully recognised
(1)
In determining the credits and debits which a company is to bring into account
for the period referred to in section 311(1) for the purposes of this Part in
30
respect of—
(a)
the creditor relationship mentioned in 311(2), or
(b)
in a case where condition A in section 311(3) is met, the debtor
relationship by reference to which that condition is met,

the assumption in subsection (2) is to be made.
35
(2)
The assumption is that an amount in respect of the whole of the relationship in
question is recognised in determining the company’s profit or loss for the
period.
(3)
But the amount of any debits to be brought into account by the company for a
period as a result of this section applying in respect of its creditor relationships
40
must not exceed the amount of any credits to be brought into account by it for
the period as a result of this section applying in respect of its debtor
relationships.
(4)
Subsection (5) applies in any case where—

Corporation Tax Bill
Part 5 — Loan Relationships
Chapter 3 — The credits and debits to be brought into account: general
138

(a)
apart from this section any credits or debits are brought into account for
a period for the purposes of this Part by the company in respect of a
loan relationship, and
(b)
the relationship is a creditor relationship within subsection (1)(a) or a
debtor relationship within subsection (1)(b).
5
(5)
The credits and debits which are to be so brought into account as a result of this
section are to be determined on the same basis of accounting as that on which
the credits or debits mentioned in subsection (4)(a) are determined.
(6)
In any other case, the credits and debits which are to be so brought into account
as a result of this section are to be determined on an amortised cost basis of
10
accounting.
Accounting bases
313
Basis of accounting: “amortised cost basis”, “fair value accounting” and “fair
value”
(1)
The general rule is that the amounts to be brought into account by a company
15
as credits and debits for any period of account for the purposes of this Part may
be determined on any basis of accounting that is in accordance with generally
accepted accounting practice and, in particular, an amortised cost basis of
accounting or fair value accounting.
(2)
But subsection (1) is subject to sections 307(3) and (4) and the following
20
provisions (which require a particular accounting basis to be used)—
(a)
section 312(5) and (6) (determination of credits and debits where
amounts not fully recognised for accounting purposes),
(b)
section 349(2) (application of amortised cost basis to connected
companies relationships),
25
(c)
section 382(2) (company partners using fair value accounting),
(d)
section 399(2) (index-linked gilt-edged securities: application of fair
value accounting),
(e)
section 453(2) (application of fair value accounting where connected
parties derive benefit from creditor relationships),
30
(f)
section 454(4) (application of fair value accounting: reset bonds etc),
(g)
section 482(2) (application of amortised cost basis of accounting to
discounts arising from a money debt under a relevant non-lending
relationship),
(h)
section 490(3) (holdings in OEICs, unit trusts and offshore funds:
35
application of fair value accounting), and
(i)
section 534(1) (application of fair value accounting where section 523
applies).
(3)
See also section 314.
(4)
In this Part “amortised cost basis of accounting”, in relation to a company’s
40
loan relationship, means a basis of accounting under which an asset or liability
representing the loan relationship is shown in the company’s accounts at cost
adjusted for cumulative amortisation and any impairment, repayment or
release.

Corporation Tax Bill
Part 5 — Loan Relationships
Chapter 3 — The credits and debits to be brought into account: general
139

(5)
In this Part “fair value accounting” means a basis of accounting under which
assets and liabilities are shown in the company’s balance sheet at their fair
value.
(6)
In this Part “fair value”, in relation to a loan relationship of a company, means
the amount which, at the time as at which the value is to be determined, is the
5
amount which the company would obtain from or, as the case may be, would
have to pay to a knowledgeable and willing person dealing at arm’s length
for—
(a)
the transfer of all the company’s rights under the relationship, and
(b)
the release of all the company’s liabilities under it.
10
314
Power to make regulations about changes from amortised cost basis
(1)
This section applies if the credits or debits to be brought into account for the
purposes of this Part in respect of assets or liabilities of a company—
(a)
are required in accordance with generally accepted accounting practice
to be dealt with for accounting purposes using fair value accounting,
15
and
(b)
were previously dealt with for those purposes on an amortised cost
basis.
(2)
The Treasury may by regulations provide that the credits or debits must
continue to be determined on an amortised cost basis of accounting.
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(3)
The regulations may—
(a)
make different provision for different cases,
(b)
make incidental, supplemental, consequential and transitional
provision and savings, and
(c)
make provision subject to an election or to other specified conditions.
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Adjustments on change of accounting policy
315
Introduction to sections 316 to 319
(1)
Sections 316 to 319 apply if—
(a)
there is a change of accounting policy in drawing up a company’s
accounts from one period of account to the next, and
30
(b)
the accounting policy in each of those periods accords with the law and
practice applicable in relation to that period.
(2)
In this section and sections 316 to 319—
(a)
the first of those periods of account is referred to as “the earlier period”,
and
35
(b)
the next is referred to as “the later period”.
(3)
Sections 316 to 319 apply, in particular, if—
(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
40
(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.

Corporation Tax Bill
Part 5 — Loan Relationships
Chapter 3 — The credits and debits to be brought into account: general
140

(4)
For a case where this section and sections 316 to 318 apply as if a change of
accounting policy had occurred, see section 416(5) (election for application of
sections 415 and 585).
316
Change of accounting policy involving change of value
(1)
If there is an increase in the carrying value of an asset representing a loan
5
relationship of the company between—
(a)
the end of the earlier period, and
(b)
the beginning of the later period,

a credit equal to the increase must be brought into account for the purposes of
this Part for the later period.
10
(2)
If there is a decrease in the carrying value of such an asset between—
(a)
the end of the earlier period, and
(b)
the beginning of the later period,

a debit equal to the decrease must be brought into account for the purposes of
this Part for the later period.
15
(3)
If there is an increase in the carrying value of a liability representing a loan
relationship of the company between—
(a)
the end of the earlier period, and
(b)
the beginning of the later period,

a debit equal to the increase must be brought into account for the purposes of
20
this Part for the later period.
(4)
If there is a decrease in the carrying value of such a liability between—
(a)
the end of the earlier period, and
(b)
the beginning of the later period,

a credit equal to the decrease must be brought into account for the purposes of
25
this Part for the later period.
(5)
This section does not apply so far as such a credit or debit as is mentioned in
this section falls to be brought into account apart from this section.
317
Carrying value
(1)
In section 316 “carrying value” means the carrying value of the asset or liability
30
recognised for accounting purposes, except as provided in subsection (4).
(2)
For the purposes of this section the “carrying value” of an asset or liability
includes amounts recognised for accounting purposes in relation to the loan
relationship in respect of—
(a)
accrued amounts,
35
(b)
amounts paid or received in advance, or
(c)
impairment losses (including provisions for bad or doubtful debts).
(3)
For the meaning of “impairment loss” see section 476(1).
(4)
In determining the profits and losses to be recognised in determining the
carrying value of the asset or liability for the purposes of this section, the
40
provisions specified in subsection (5) apply as they apply for the purposes of
determining the credits and debits to be brought into account under this Part.
(5)
Those provisions are—

Corporation Tax Bill
Part 5 — Loan Relationships
Chapter 3 — The credits and debits to be brought into account: general
141

(a)
sections 340 and 341 (continuity of treatment on group transfers and
transfers of insurance business),
(b)
section 349(2) (application of amortised cost basis of accounting to
connected companies relationships),
(c)
section 354 (exclusion of debits for impaired or released connected
5
companies debts),
(d)
section 360 (exclusion of credits on reversal of impairments of
connected companies debts),
(e)
sections 361 to 363 (deemed debt releases on impaired debts becoming
held by connected company),
10
(f)
Chapter 8 (connected parties relationships: late interest),
(g)
sections 399 and 400 (treatment of index-linked gilt-edged securities),
(h)
section 404 (restriction on deductions etc relating to FOTRA securities),
(i)
sections 409 to 412 (deeply discounted securities of close companies),
(j)
section 415(2) (loan relationships with embedded derivatives),
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(k)
sections 422 and 423 (transfer of loan relationships on European cross-
border transfers of business),
(l)
sections 433 and 434 (transfer of loan relationships on European cross-
border mergers),
(m)
section 454(4) (accounting method where rate of interest is reset),
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(n)
section 465 (exclusion of distributions except in tax avoidance cases),
(o)
paragraph 62 of Schedule 2 (disregard of pre-2005 disallowed debits),
and
(p)
paragraph 69 of Schedule 2 (5½% Treasury Stock 2008-2012 not
redeemed before 6 April 2009).
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318
Change of accounting policy following cessation of loan relationship
(1)
This section applies if—
(a)
the company has ceased to be a party to a loan relationship in an
accounting period (“the cessation period”),
(b)
section 331 (company ceasing to be party to loan relationship) applied
30
to the cessation, and
(c)
there is a difference between the amount outstanding in respect of the
loan relationship (see subsection (5))—
(i)
at the end of the earlier period, and
(ii)
at the beginning of the later period.
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(2)
In the case of an increase in that amount—
(a)
if the company was the creditor under the loan relationship, it must
bring into account for the later period a credit equal to the increase for
the purposes of this Part, and
(b)
if the company was the debtor under the loan relationship, it must
40
bring into account for the later period a debit equal to the increase for
the purposes of this Part.
(3)
In the case of a decrease in that amount—
(a)
if the company was the creditor under the loan relationship, it must
bring into account for the later period a debit equal to the decrease for
45
the purposes of this Part, and