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 12 — Special rules for particular kinds of securities
183

capital trust that prepares accounts in accordance with international
accounting standards.
(5)
An order under subsection (5) may make—
(a)
different provision for different cases, and
(b)
incidental, supplemental, consequential and transitional provision and
5
savings.
Credit unions
397
Credit unions
(1)
In calculating the income of a credit union for any accounting period, no credit
is to be brought into account for the purposes of this Part in respect of a loan
10
relationship of the union if a member of the union stands in the position of
debtor in relation to the debt in question.
(2)
But subsection (1) does not apply if the credit union—
(a)
is obliged to make a return under section 887(2) of ITA 2007 for the
accounting period, and
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(b)
has not done so within—
(i)
3 months after the end of the period, or
(ii)
such longer period as an officer of Revenue and Customs
allows.
(3)
No debit is to be brought into account for the purposes of this Part in respect of
20
a loan relationship of a credit union if a member of the union stands in the
position of creditor in relation to the debt in question.
Chapter 12
Special rules for particular kinds of securities
Introduction
25
398
Overview of Chapter
(1)
This Chapter sets out rules relating to the holding of particular kinds of
securities.
(2)
In particular, see—
(a)
sections 399 to 405 (gilt-edged securities),
30
(b)
sections 406 to 412 (deeply discounted securities: connected companies
and close companies),
(c)
sections 413 and 414 (funding bonds),
(d)
sections 415 to 419 (derivatives), and
(e)
section 420 (assumptions where options etc apply).
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(3)
For other special rules about deeply discounted securities, see section 385
(company partners’ shares where firm owns deeply discounted securities).

Corporation Tax Bill
Part 5 — Loan Relationships
Chapter 12 — Special rules for particular kinds of securities
184

Gilt-edged securities
399
Index-linked gilt-edged securities: basic rules
(1)
This section applies if a loan relationship is represented by an index-linked gilt-
edged security.
(2)
The amounts to be brought into account for the purposes of this Part are to be
5
determined using fair value accounting.
(3)
But, in calculating those amounts, the adjustment specified in section 400
(adjustments for changes in index) must be made if that section applies.
(4)
In this section and section 400 “index-linked gilt-edged securities” means any
gilt-edged securities under which the amounts of the payments are determined
10
wholly or partly by reference to the retail prices index.
(5)
For the meaning of “gilt-edged securities”, see section 476(1).
400
Index-linked gilt-edged securities: adjustments for changes in index
(1)
This section applies if—
(a)
the amounts to be brought into account for the purposes of this Part in
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respect of a gilt-edged security fall to be determined by reference to its
value at two different times, and
(b)
there is a change in the retail prices index between the earlier and the
later time.
(2)
If that change is an increase, the carrying value of the security at the earlier time
20
is increased by the same percentage as the percentage increase in the retail
prices index between those times.
(3)
If that change is a reduction, the carrying value of the security at the earlier
time is reduced by the same percentage as the percentage reduction in the retail
prices index between those times.
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(4)
The Treasury may, in relation to any description of index-linked gilt-edged
securities, by order provide that—
(a)
there are to be no adjustments under this section, or
(b)
an adjustment specified in the order is to be made instead.
(5)
An order under subsection (4)—
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(a)
may not apply to a security issued before the making of the order, but
(b)
may make different provision for different descriptions of securities.
(6)
The general rule is that the percentage increase or reduction in the retail prices
index is determined for the purposes of this section by reference to the
difference between—
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(a)
the index for the month in which the earlier time falls, and
(b)
the index for the month in which the later time falls.
(7)
But if the earlier time falls at the beginning of an accounting period which
begins with the first day of a month, the index for the previous month is used
for the purposes of subsection (6)(a).
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Corporation Tax Bill
Part 5 — Loan Relationships
Chapter 12 — Special rules for particular kinds of securities
185

401
Gilt strips
(1)
This section applies if a loan relationship is represented by—
(a)
a strip of a gilt-edged security, or
(b)
any other gilt-edged security.
(2)
Subsections (3) and (4) apply if a person exchanges a gilt-edged security for
5
strips of that security.
(3)
The security is treated as having been redeemed at the time of the exchange by
the payment to that person of its market value.
(4)
The person is treated as having acquired each strip for an amount equal to—

where—
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A is the market value of the security at the time of the exchange,
B is the market value of the strip at that time, and
C is the total of the market values at that time of all the strips received in
the exchange.
(5)
Subsections (6) and (7) apply if strips of a gilt-edged security are consolidated
15
into a single gilt-edged security by being exchanged by any person for that
security.
(6)
Each strip is treated as having been redeemed at the time of the exchange by
the payment to that person of the amount equal to its market value.
(7)
The person is treated as having acquired the security for the amount equal to
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the total of the market values of all the strips given in the exchange.
(8)
For the meaning of “market value” and “strip” in relation to securities, see
section 402 and section 403 respectively.
402
Market value of securities
(1)
References in section 401 to the market value of a security given or received in
25
exchange for another are references to its market value at the time of the
exchange.
(2)
The Treasury may by regulations make provision for the purposes of section
401 and this section as to the way of determining the market value at any time
of—
30
(a)
any strip, or
(b)
any other gilt-edged security.
(3)
The regulations may make—
(a)
different provision for different cases, and
(b)
incidental, supplemental, consequential and transitional provision and
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savings.

Corporation Tax Bill
Part 5 — Loan Relationships
Chapter 12 — Special rules for particular kinds of securities
186

403
Meaning of “strip”
(1)
In sections 401 and 402 “strip”, in relation to a gilt-edged security, means a
security issued under the National Loans Act 1968 (c. 13) which meets
conditions A, B and C.
(2)
Condition A is that the security is issued for the purpose of representing the
5
right to or of securing—
(a)
a payment corresponding to a payment of interest or principal
remaining to be made under the gilt-edged security, or
(b)
two or more payments each corresponding to a payment to be so made.
(3)
Condition B is that the security is issued in conjunction with the issue of one or
10
more other securities which, together with that security—
(a)
represent the right to, or
(b)
secure,

payments corresponding to every payment remaining to be made under the
gilt-edged security.
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(4)
Condition C is that the security is not itself a security that—
(a)
represents the right to, or
(b)
secures,

payments corresponding to a part of every payment remaining to be made
under the gilt-edged security.
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(5)
After the balance has been struck for a dividend on a gilt-edged security, a
payment to be made in respect of that dividend is treated for the purposes of
conditions A, B and C as not being a payment remaining to be made under that
security.
404
Restriction on deductions etc relating to FOTRA securities
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(1)
A company which meets conditions A and B is not to bring into account for the
purposes of this Part—
(a)
any amount relating to changes in the value of a FOTRA security, or
(b)
any debit in respect of the loan relationship represented by the security,
including any expenses related to holding the security or any
30
transaction concerning it.
(2)
Condition A is that the company is the beneficial owner of the security.
(3)
Condition B is that the company is a company which would be exempt from
corporation tax on the security under section 1279 (exemption of profits from
FOTRA securities).
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(4)
In this section “FOTRA security” has the same meaning as in that section (see
section 1280(1)).
405
Certain non-UK residents with interest on 3½% War Loan 1952 Or After
(1)
This section applies if—
(a)
in any accounting period a non-UK resident company carries on a
40
business in the United Kingdom—
(i)
consisting of banking or insurance, or
(ii)
consisting wholly or partly of dealing in securities, and

Corporation Tax Bill
Part 5 — Loan Relationships
Chapter 12 — Special rules for particular kinds of securities
187

(b)
in calculating the profits of the business for the period any amount is
disregarded as a result of section 1279 (exemption of profits from
FOTRA securities) because of a condition subject to which any 3½%
War Loan 1952 Or After was issued.
(2)
Interest on money borrowed for the purposes of the business is to be brought
5
into account as a debit for the purposes of this Part for that period only so far
as it exceeds the ineligible amount.
(3)
The ineligible amount is found as follows—
Step 1

Add together all sums borrowed for the purposes of the business and still
10
owing in the accounting period.
Step 2

Deduct any sums carrying interest that is not brought into account as a debit
under this Part (otherwise than because of subsection (2)).
Step 3
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If the amount found at Step 2 exceeds the total cost of the 3½% War Loan 1952
Or After held for the purposes of the business in the accounting period, deduct
the excess from that amount.
Step 4

Calculate the average rate of interest in the accounting period on money
20
borrowed for the purposes of the business.
Step 5

Calculate the amount of interest payable on the amount found at Step 3 at the
rate found at Step 4 for the accounting period.

The result is the ineligible amount.
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(4)
If the company’s holding of 3½% War Loan 1952 Or After has fluctuated
during the accounting period, the total cost for the purposes of Step 3 is taken
to be—

where—
C is the cost of acquisition of the initial holding (if any) and any holdings
30
acquired during the accounting period,
AH is the average holding in that period, and
TH is the total of the initial holding (if any) and any holdings acquired
during the accounting period.
(5)
In subsection (4) “initial holding” means the holding held by the company at
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the beginning of the accounting period.