Corporation Tax Bill

House of Commons

Session 2008 - 09
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Other Bills before Parliament

Corporation Tax Bill

Corporation Tax Bill
Part 5 — Loan Relationships
Chapter 12 — Special rules for particular kinds of securities
192

Funding bonds
413
Issue of funding bonds
(1)
This section applies to the issue of funding bonds to a creditor in respect of a
liability to pay interest on a debt incurred by a body corporate, a government,
a public institution or other public authority.
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(2)
The issue is treated for the purposes of the Corporation Tax Acts as if it were
the payment of so much of that interest as equals the market value of the bonds
at their issue.
(3)
In this section “funding bonds” includes any bonds, stocks, shares, securities or
certificates of indebtedness.
10
414
Redemption of funding bonds
(1)
The redemption of funding bonds is not treated as the payment of interest on
a debt for the purposes of the Corporation Tax Acts if their issue was treated as
the payment of interest on the debt under—
(a)
section 413, or
15
(b)
section 380 of ITTOIA 2005 (which makes provision corresponding to
section 413 for income tax purposes).
(2)
In this section “funding bonds” includes any bonds, stocks, shares, securities or
certificates of indebtedness.
Derivatives
20
415
Loan relationships with embedded derivatives
(1)
This section applies if in accordance with generally accepted accounting
practice a company treats the rights and liabilities under a loan relationship to
which it is a party as divided between—
(a)
rights and liabilities under a loan relationship (“the host contract”), and
25
(b)
rights and liabilities under one or more derivative financial
instruments or equity instruments.
(2)
The company is treated for the purposes of this Part as a party to a loan
relationship whose rights and liabilities consist only of those of the host
contract.
30
(3)
For the corresponding treatment of the rights and liabilities within subsection
(1)(b), see section 585 (loan relationships with embedded derivatives).
416
Election for application of sections 415 and 585
(1)
This section applies if—
(a)
a company is subject to old UK GAAP for a period of account,
35
(b)
at the beginning of its first relevant period of account the company did
not hold any assets (“relevant assets”) which it is not permitted under
old UK GAAP to treat as mentioned in section 415(1),

Corporation Tax Bill
Part 5 — Loan Relationships
Chapter 12 — Special rules for particular kinds of securities
193

(c)
the company subsequently acquires one or more relevant assets (to
which sections 415 and 585 do not apply because of the company being
subject to old UK GAAP), and
(d)
the company would have been permitted to treat the relevant assets as
mentioned in section 415(1) if it had been subject to—
5
(i)
international accounting standards, or
(ii)
new UK GAAP.
(2)
The company may elect that this Part and Part 7 (derivative contracts) should
apply as if sections 415 and 585 did apply.
(3)
The election has effect in relation to all relevant assets held by the company
10
including those subsequently acquired, except as provided in subsection (4).
(4)
An election made on or after 12 March 2008 does not have effect in relation to
any relevant assets in the case of which section 418 (loan relationships treated
differently by connected debtor and creditor) applies.
(5)
If an election is made under this section, sections 315 to 318 (adjustments on
15
change of accounting policy) apply as if there were a change of accounting
policy consisting of the company treating its relevant assets as mentioned in
section 415(1) as from the date the election has effect.
(6)
See also section 613(4) (which makes provision corresponding to subsection (5)
for the purposes of Part 7).
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(7)
In this section—
“first relevant period of account”, in relation to a company, means the first
period of account of the company beginning on or after 1 January 2005
(the first period in relation to which section 94A of FA 1996 (which is
rewritten in section 415) had effect),
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“old UK GAAP” means UK generally accepted accounting practice as it
applied for periods of account beginning before 1 January 2005, and
“new UK GAAP” means UK generally accepted accounting practice as it
applies for periods of account beginning on or after that date.
(8)
Section 417 makes further provision about elections under this section.
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417
Further provisions about elections under section 416
(1)
An election under section 416 must be made not later than 90 days after the
acquisition of the relevant assets or, if there is more than one acquisition, the
first of them.
(2)
The election is irrevocable.
35
(3)
The election has effect from the beginning of the period of account in which the
first relevant asset is acquired.
(4)
In this section “relevant assets” has the same meaning as in section 416.
418
Loan relationships treated differently by connected debtor and creditor
(1)
This section applies if—
40
(a)
two connected companies are party to a loan relationship, one (“the
debtor”) as debtor and the other (“the creditor”) as creditor, and
(b)
conditions A, B and C are met.

Corporation Tax Bill
Part 5 — Loan Relationships
Chapter 12 — Special rules for particular kinds of securities
194

(2)
Condition A is that the debtor, in accordance with generally accepted
accounting practice, treats the rights and liabilities under the loan relationship
as divided between—
(a)
rights and liabilities under a loan relationship (“the host contract”) and,
(b)
rights and liabilities under one or more derivative financial
5
instruments or equity instruments.
(3)
Condition B is that the creditor, in accordance with generally accepted
accounting practice, does not treat its rights and liabilities under the loan
relationship as so divided.
(4)
Condition C is that—
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(a)
the debits brought into account by the debtor under this Part in respect
of the host contract for any accounting period, exceed
(b)
the credits brought into account (otherwise than as a result of this
section) by the creditor in respect of the loan relationship for the
corresponding accounting period or periods of the creditor.
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(5)
The creditor is treated for the purposes of this Part as bringing into account for
the corresponding accounting period or periods additional credits in respect of
the loan relationship of an amount equal to the excess.
(6)
But if the creditor is a party to the loan relationship as creditor during only part
of the corresponding accounting period (or any of the corresponding periods),
20
it is treated for the purposes of this Part as bringing into account for the period
only such part of the excess as is just and reasonable.
(7)
Section 419 supplements this section.
419
Section 418: supplementary
(1)
References in section 418 to a company being a party to a loan relationship as
25
debtor or creditor include a company which indirectly stands in the position of
a debtor or creditor as respects the loan relationship by reference to a series of
loan relationships or relevant money debts.
(2)
In subsection (1) “relevant money debt” means a money debt that would be a
loan relationship if a company directly stood in the position of debtor or
30
creditor.
(3)
For the purposes of section 418 an accounting period of the creditor
corresponds with an accounting period of the debtor if—
(a)
it coincides with it, or
(b)
it is wholly or partly within it.
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(4)
If a corresponding accounting period of the creditor does not coincide with that
of the debtor, such apportionments as are just and reasonable are to be made
for the purposes of section 418.
(5)
Two companies are connected for the purposes of section 418 if their
accounting results are reflected in the consolidated group accounts of a group
40
of companies.
(6)
Subsection (5) does not affect the application of section 839 of ICTA (how to tell
whether persons are connected).
(7)
In this section “the debtor” and “the creditor” have the same meaning as in
section 418.
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Corporation Tax Bill
Part 5 — Loan Relationships
Chapter 13 — European cross-border transfers of business
195

Options etc
420
Assumptions where options etc apply
(1)
This section applies if—
(a)
the answer to any question specified in subsection (2)—
(i)
depends on the exercise of an option by a party to a loan
5
relationship (“A”) or A’s associate, or
(ii)
is otherwise under the control of A or A’s associate, and
(b)
an amortised cost basis of accounting applies for an accounting period.
(2)
The questions are—
(a)
whether any amount will become due under the relationship after the
10
period ends,
(b)
how much will become due under it after the period ends, and
(c)
when after the end of the period an amount will become due under the
relationship.
(3)
In determining the credits and debits to be brought into account for the
15
accounting period in accordance with an amortised cost basis, the assumption
in subsection (4) is to be made.
(4)
The assumption is that A or A’s associate will exercise the power to determine
whether and on what date any amount will become due in the way which
appears to be the most advantageous to A.
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(5)
That way is to be determined—
(a)
as at the end of the accounting period, and
(b)
ignoring taxation.
Chapter 13
European cross-border transfers of business
25
Introduction
421
Introduction to Chapter
(1)
This Chapter applies if—
(a)
condition A or B is met, and
(b)
each of the companies mentioned in subsection (3)(a) or (4)(a) makes a
30
claim under this section,

but see section 426 (tax avoidance etc) and section 429 (disapplication of
Chapter where transparent entities involved).
(2)
Sections 424 and 425 (reorganisations involving loan relationships) also apply
if, in addition to the conditions in section 424(1)(a) and (b), condition C is met
35
in relation to the transfer in the course of which the reorganisation in question
occurs.
(3)
Condition A is that—
(a)
a company resident in one member State transfers to a company
resident in another member State the whole or part of a business carried
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on in the United Kingdom,

Corporation Tax Bill
Part 5 — Loan Relationships
Chapter 13 — European cross-border transfers of business
196

(b)
the transfer is wholly in exchange for shares or debentures issued by
the transferee to the transferor, and
(c)
immediately after the transfer the transferee is within the charge to
corporation tax.
(4)
Condition B is that—
5
(a)
a company transfers part of its business to one or more companies,
(b)
the transferor is resident in one member State,
(c)
the part of the transferor’s business which is transferred is carried on
by the transferor in the United Kingdom,
(d)
at least one transferee is resident in a member State other than that in
10
which the transferor is resident (and each transferee is resident in a
member State, but not necessarily the same one),
(e)
the transferor continues to carry on a business after the transfer,
(f)
immediately after the transfer each transferee is within the charge to
corporation tax, and
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(g)
the transfer—
(i)
is made in exchange for the issue of shares in or debentures of
each transferee to each person holding shares in or debentures
of the transferor, or
(ii)
is not so made only because, and only so far as, a transferee is
20
prevented from so issuing such shares or debentures by section
658 of the Companies Act 2006 (c. 46) (general rule against
limited company acquiring own shares) or by a corresponding
provision of the law of another member State preventing such
an issue.
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(5)
Condition C is that—
(a)
a UK resident company transfers part of its business to one or more
companies,
(b)
the part of the transferor’s business which is transferred to the
transferees was carried on immediately before the transfer in a member
30
State other than the United Kingdom through a permanent
establishment, and
(c)
the conditions in subsection (4)(d), (e) and (g) are met.
(6)
In this Chapter—
“the transfer of business” means the transfer of business mentioned in
35
subsection (3)(a), (4)(a) or (5)(a),
“transferee” has the same meaning as in subsection (3), (4) or (5), and
“the transferor” has the same meaning as in subsection (3), (4) or (5).
(7)
For the meaning of “company” and “resident in a member State”, see section
430.
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Transfers of loan relationships at notional carrying value
422
Transfer of loan relationship at notional carrying value
(1)
This section applies if in the course of the transfer of business the transferor
transfers an asset or liability representing a loan relationship to a transferee.

Corporation Tax Bill
Part 5 — Loan Relationships
Chapter 13 — European cross-border transfers of business
197

(2)
For the purpose of determining the credits and debits to be brought into
account in respect of the loan relationship for the purposes of this Part, the
transferor and the transferee are treated as having entered into the transfer of
that asset or liability for consideration of an amount equal to the notional
carrying value of the asset or liability.
5
(3)
For the purposes of this section—
(a)
“carrying value” has the same meaning as it has for the purposes of
section 316 (see section 317), and
(b)
“notional carrying value”, in relation to an asset or liability, means the
amount which would have been its carrying value in the accounts of the
10
transferor if a period of account had ended immediately before the date
when the transferor ceased to be a party to the loan relationship.
(4)
This section is subject to section 423 (transferor using fair value accounting).
423
Transferor using fair value accounting
(1)
This section applies instead of section 422 if, in a case where that section would
15
otherwise apply, the transferor is regarded for the purposes of this section as
using fair value accounting in respect of the loan relationship (see subsection
(4)).
(2)
The amount which is to be brought into account by the transferor in respect of
the transfer of the asset or liability mentioned in section 422(1) (“the
20
transferor’s amount”) is—
(a)
if an asset is to be brought into account, its fair value as at the date when
the transferee becomes a party to the loan relationship, or the fair value
of the rights under or interest in it as at that date, and
(b)
if a liability is to be brought into account, its fair value as at that date.
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(3)
For any accounting period in which the transferee is a party to the loan
relationship, for the purpose of determining the credits and debits to be
brought into account in respect of it for the purposes of this Part, the transferee
is treated as if it had acquired the asset or liability representing the relationship
for consideration of an amount equal to the transferor’s amount.
30
(4)
The transferor is regarded for the purposes of this section as using fair value
accounting in respect of the loan relationship only if the credits and debits to
be brought into account for the purposes of this Part as respects the
relationship are determined on that basis.
(5)
It does not matter for the purposes of subsection (4) if the transferor does not
35
otherwise use fair value accounting in respect of the loan relationship.
424
Reorganisations involving loan relationships
(1)
This section applies if—
(a)
sections 127 to 130 of TCGA 1992 (reorganisations: equation of original
shares and new holding)—
40
(i)
apply in relation to a reorganisation, or
(ii)
would so apply but for section 116(5) of that Act (which
disapplies those sections where the original shares or the new
holding consists of or includes a qualifying corporate bond),

Corporation Tax Bill
Part 5 — Loan Relationships
Chapter 13 — European cross-border transfers of business
198

(b)
the original shares consist of or include an asset representing a loan
relationship, and
(c)
either—
(i)
section 422 or 423 applies as a result of condition B in section 421
being met in relation to the transfer in the course of which the
5
reorganisation occurs or
(ii)
condition C in section 421 is met in relation to that transfer.
(2)
For the purposes of this Part such debits and credits are to be brought into
account as would be brought into account if the reorganisation were a disposal
of the asset representing the loan relationship for consideration of an amount
10
equal to its notional carrying value.
(3)
For the purposes of this section, the notional carrying value of that asset is the
amount which would have been its carrying value in the accounts of the
original holder if a period of account had ended immediately before the date
when the reorganisation occurred.
15
(4)
In this section—
“carrying value” has the same meaning as it has for the purposes of
section 316 (see section 317),
“original holder” means a person holding the original shares immediately
before the reorganisation,
20
“original shares” has the meaning given by section 126(1) of TCGA 1992
(application of sections 126 to 131 of that Act), and
“reorganisation” includes anything to which sections 127 to 130 of that Act
apply as if it were a reorganisation.
(5)
This section is subject to—
25
(a)
section 425 (original holder using fair value accounting), and
(b)
section 429 (disapplication of Chapter where transparent entities
involved).
425
Original holder using fair value accounting
(1)
This section applies instead of section 424 if, in a case where that section would
30
otherwise apply, the original holder is regarded for the purposes of this section
as using fair value accounting in respect of the loan relationship constituting or
included in the original shares.
(2)
The amount which is to be brought into account by the original holder in
respect of the reorganisation (“the disposal amount”) is the fair value of the
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asset representing the loan relationship as at the date when the reorganisation
occurred, or of the rights under or interest in that relationship as at that date.
(3)
For any accounting period in which a successor creditor company is a party to
the loan relationship, for the purpose of determining the credits and debits to
be brought into account in respect of the relationship for the purposes of this
40
Part, the successor creditor company is treated as if it had acquired the asset
representing the loan relationship for consideration of an amount equal to the
disposal amount.
(4)
Subsections (4) and (5) of section 423 apply for the purposes of this section as
they apply for the purposes of that section, but taking the references in that
45
section to the transferor as references to the original holder.