Corporation Tax Bill

House of Commons

Session 2008 - 09
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Corporation Tax Bill

Corporation Tax Bill
Part 5 — Loan Relationships
Chapter 15 — Tax avoidance
210

Transactions not at arm’s length: exchange gains and losses
447
Exchange gains and losses on debtor relationships: loans disregarded under
Schedule 28AA to ICTA
(1)
Subsections (2) and (3) apply if—
(a)
a company has a debtor relationship in an accounting period,
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(b)
an exchange gain or loss arises in the period in respect of a liability
representing the relationship, and
(c)
as a result of paragraph 1 of Schedule 28AA to ICTA (provision not at
arm’s length) the profits and losses of the company are calculated for
tax purposes for the period as if—
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(i)
the loan had not been made, or
(ii)
part of the loan had not been made.
(2)
In a case where subsection (1)(c)(i) applies, the exchange gain or loss must be
be left out of account in determining the credits or debits to be brought into
account for the purposes of this Part.
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(3)
In a case where subsection (1)(c)(ii) applies, a proportion of the exchange gain
or loss must be left out of account in determining those credits or debits.
(4)
That proportion is the proportion that the part of the loan that is treated as if it
had not been made bears to the whole of the loan.
(5)
Nothing in Schedule 28AA to ICTA requires the amounts brought into account
20
under this Part in respect of exchange gains or losses from loan relationships
to be calculated on the assumption that the arm’s length provision had been
made instead of the actual provision.
(6)
But subsection (5) does not affect the application of subsections (2) and (3)
under subsection (1).
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(7)
In this section “the arm’s length provision” and “the actual provision” have the
same meaning as in Schedule 28AA to ICTA (see paragraph 1 of that Schedule).
448
Exchange gains and losses on debtor relationships: equity notes where holder
associated with issuer
(1)
This section applies if—
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(a)
a company has a debtor relationship in an accounting period,
(b)
an exchange gain or loss arises in the period in respect of a liability
representing the relationship, and
(c)
the whole of any interest or other distribution out of the assets of the
company in respect of securities of the company which represent the
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relationship is regarded as a distribution because of section
209(2)(e)(vii) of ICTA (equity notes held by company associated with
issuer or by a funded company).
(2)
The exchange gain or loss must be left out of account in determining the credits
or debits to be brought into account for the purposes of this Part.
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449
Exchange gains and losses on creditor relationships: no corresponding debtor
relationship
(1)
This section applies if—

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Part 5 — Loan Relationships
Chapter 15 — Tax avoidance
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(a)
a company has a creditor relationship in an accounting period, and
(b)
an exchange gain or loss arises in the period in respect of an asset
representing the relationship.
(2)
The exchange gain or loss must be left out of account in determining the credits
or debits to be brought into account for the purposes of this Part if conditions
5
A and B are met.
(3)
Condition A is that the transaction giving rise to the loan is such that it would
not have been entered into at all if the parties had been dealing at arm’s length.
(4)
Condition B is that there is no corresponding debtor relationship.
(5)
For the meaning of “corresponding debtor relationship”, see section 450.
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(6)
This section is subject to section 451 (exception to this section where loan
exceeds arm’s length amount).
450
Meaning of “corresponding debtor relationship”
(1)
In section 449 “corresponding debtor relationship” means a debtor relationship
which—
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(a)
corresponds to the creditor relationship mentioned in section 449(1),
and
(b)
is of such a kind that conditions A and B are met.
(2)
Condition A is that such credits as are mentioned in subsection (3) would fall
to be brought into account for the purposes of this Part in respect of exchange
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gains from that debtor relationship.
(3)
Those credits are credits corresponding to, and of the same amount as, the
debits that would fall to be so brought into account in respect of exchange
losses from the creditor relationship apart from section 449.
(4)
Condition B is that such debits as are mentioned in subsection (5) would fall to
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be so brought into account in respect of exchange losses from that debtor
relationship.
(5)
Those debits are debits corresponding to, and of the same amount as, the
credits that would fall to be so brought into account in respect of exchange
gains from the creditor relationship apart from section 449.
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(6)
In determining for the purposes of this section whether credits or debits would
fall to be so brought into account, section 328(2) to (7) (as a result of which some
exchange gains and losses are excluded from this Part) is ignored.
451
Exception to section 449 where loan exceeds arm’s length amount
(1)
Section 449 does not apply if the circumstances are such that, had the parties to
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the relevant transaction been dealing at arm’s length, the amount of the loan
would have been an amount (“the arm’s length amount”) greater than nil, but
less than its actual amount.
(2)
Accordingly, an exchange gain or loss which arises in the accounting period in
respect of an asset representing the creditor relationship is not required by that
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section to be left out of account.
(3)
But if—

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Part 5 — Loan Relationships
Chapter 15 — Tax avoidance
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(a)
the circumstances are as mentioned in subsection (1), and
(b)
there is no corresponding debtor relationship,

only a proportion of the exchange gain or loss may be taken into account in
determining the credits or debits to be brought into account for the purposes
of this Part.
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(4)
That proportion is the proportion which the arm’s length amount bears to the
actual amount of the loan.
(5)
In this section—
“corresponding debtor relationship” has the same meaning as in section
449 (see section 450), and
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“the relevant transaction” means the transaction giving rise to the loan as
a result of which the company has the creditor relationship in the
accounting period in question.
452
Exchange gains and losses where loan not on arm’s length terms
(1)
This subsection applies if—
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(a)
a company would be treated as having a debtor relationship in an
accounting period if a claim were made under paragraph 6D(2) of
Schedule 28AA to ICTA in relation to that period, and
(b)
for that period there is a connection between that company and the
company that would have the corresponding creditor relationship.
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(2)
If subsection (1) applies, it is assumed that such a claim is made for the purpose
of determining the debits or credits to be brought into account for the purposes
of this Part in respect of any exchange gains or losses arising in that period in
respect of the liability representing that debtor relationship.
(3)
Subsections (4) and (5) apply if—
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(a)
because of a claim made under paragraph 6D(2) of Schedule 28AA to
ICTA more than one company is treated for any purpose as having a
debtor relationship represented by the same liability, or
(b)
because of the claim that is assumed to be made under subsection (2)
more than one company is so treated.
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(4)
The total amount of the credits brought into account for the purposes of this
Part in respect of exchange gains from those debtor relationships must not
exceed the total amount of the debits brought into account for those purposes
in respect of exchange losses from those relationships.
(5)
The total amount of the debits brought into account for those purposes in
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respect of exchange losses from the corresponding creditor relationship must
not exceed the total amount of the credits brought into account for those
purposes in respect of exchange gains from that relationship.
(6)
Section 466 (companies connected for an accounting period) applies for the
purposes of this section.
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Corporation Tax Bill
Part 5 — Loan Relationships
Chapter 15 — Tax avoidance
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Connected parties deriving benefit from creditor relationships
453
Connected parties deriving benefit from creditor relationships
(1)
This section applies in the case of any loan relationship that is a creditor
relationship of a company (“A”) if—
(a)
the return to A from the relationship is less than a commercial return,
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(b)
another company (“B”) that is connected with A directly or indirectly
derives any benefit as a result of any arrangements made—
(i)
in consequence of the relationship, or
(ii)
otherwise in connection with the relationship, and
(c)
that benefit is designed to represent some or all of the amount by which
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the return to A from the relationship is less than a commercial return.
(2)
The credits to be brought into account by A in respect of the relationship for the
purposes of this Part are to be determined on the basis of fair value accounting.
(3)
The fair value of A’s rights under the relationship must include the fair value
of the benefit which is derived by B as a result of the arrangements.
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(4)
In determining the return to A from the relationship for the purposes of
subsection (1)(a), any benefit which A derives directly or indirectly from the
benefit derived by B as mentioned in subsection (1)(b) is ignored.
(5)
In this section—
“arrangements” includes any agreement or understanding, whether or
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not it is legally enforceable,
“benefit” includes value in any form, and
“commercial return” means a return on an investment of money at a
commercial rate of interest.
Tax advantages from resetting interest rates ("reset bonds")
25
454
Application of fair value accounting: reset bonds etc
(1)
This section applies if—
(a)
a company has a creditor relationship,
(b)
the object, or one of the main objects, of the company entering into or
becoming a party to the relationship was the securing of a tax
30
advantage, and
(c)
conditions A and B are met in relation to an asset representing the
relationship.
(2)
Condition A is that there is or has at any time been a change in—
(a)
the rate of interest payable in the case of the asset,
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(b)
the amount payable to discharge the debt,
(c)
the time at which any payments of interest under the asset fall due, or
(d)
the time at which any other payments under the asset fall due.
(3)
Condition B is that the difference between—
(a)
the fair value of the asset immediately after the change, and
40
(b)
the issue price of the asset,

is equal to at least 5% of the issue price of the asset.

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Part 5 — Loan Relationships
Chapter 16 — Non-trading deficits
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(4)
On and after the day on which conditions A and B become met in relation to an
asset the credits and debits to be brought into account for the purposes of this
Part as respects the loan relationship are to be determined using fair value
accounting.
(5)
In determining the fair value of an asset for any purpose of this section, it is
5
assumed that all amounts payable by the debtor will be paid in full as they fall
due.
(6)
For the purposes of subsection (1)(b), it does not matter for whom the
advantage is secured.
Disposals for consideration not fully recognised by accounting practice
10
455
Disposals for consideration not fully recognised by accounting practice
(1)
This section applies if in any accounting period (“the relevant accounting
period”) a company with the relevant avoidance intention disposes of rights
under a creditor relationship wholly or partly for consideration which—
(a)
is not wholly in the form of money or a debt which falls to be settled by
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the payment of money, and
(b)
is not fully recognised.
(2)
The relevant avoidance intention is the intention of eliminating or reducing the
credits to be brought into account for the purposes of this Part.
(3)
Consideration is not fully recognised if, as a result of the application of
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generally accepted accounting practice, the full amount or value of the
consideration is not recognised in determining the company’s profit or loss for
the relevant accounting period or any other accounting period.
(4)
In determining the credits which the company must bring into account for the
relevant accounting period for the purposes of this Part, it is assumed that the
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whole of the consideration is recognised in determining the company’s profit
or loss for that period.
(5)
But this section does not apply if paragraph 1(2) of Schedule 28AA to ICTA
(provision not at arm’s length) operates in relation to the disposal so as to
increase the tax liability of the company.
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Chapter 16
Non-trading deficits
456
Introduction to Chapter
(1)
This Chapter applies if for any accounting period a company has a non-trading
deficit from its loan relationships under section 301(6).
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(2)
In this Chapter “the deficit” and “the deficit period” mean that deficit and that
period respectively (but see section 458(5)).
(3)
Sections 457 and 458 set out the rules about carrying the deficit forward to later
accounting periods.
(4)
Sections 459 and 460 deal with claims for the deficit to be dealt with differently.
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Corporation Tax Bill
Part 5 — Loan Relationships
Chapter 16 — Non-trading deficits
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(5)
Sections 461 to 463 deal with the consequences of such claims.
457
Basic rule for deficits: carry forward to accounting periods after deficit period
(1)
The basic rule is that the deficit must be carried forward and set off against
non-trading profits of the company for accounting periods after the deficit
period in accordance with subsection (3) and section 458.
5
(2)
That rule does not apply to so much of the deficit as—
(a)
is surrendered as group relief under section 403 of ICTA, or
(b)
is the subject of a claim by the company under section 459 (claim to set
off deficit against profits of deficit period or earlier periods).
(3)
So much of the amount carried forward from the deficit period as is not the
10
subject of a claim under section 458(1) must be set off against the non-trading
profits of the company for the next accounting period after the deficit period.
(4)
Those profits are reduced accordingly.
(5)
In this Chapter “non-trading profits”, in relation to a company, means so much
of the company’s profits as does not consist of trading income for the purposes
15
of section 393A of ICTA (setting-off of trading losses against profits of the same
or an earlier period).
458
Claim to carry forward deficit to later accounting periods
(1)
The company may make a claim for so much of the amount carried forward
from the deficit period as is specified in the claim to be excepted from being set
20
off against non-trading profits of the first accounting period after the deficit
period (“the first later period”).
(2)
Any such claim must be made within the period of 2 years after the end of the
first later period.
(3)
Subsection (4) applies if any amount is carried forward from the deficit period
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under section 457(1) which—
(a)
cannot be set off under section 457(3) against non-trading profits of the
first later period, or
(b)
is the subject of a claim under subsection (1).
(4)
That amount is treated for the purposes of this Part as if it were—
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(a)
an amount of non-trading deficit from the company’s loan
relationships for the first later period, and
(b)
an amount which falls to be carried forward and set against non-
trading profits of later accounting periods under section 457(1).
(5)
Accordingly, section 457 and this section apply as if the first later period were
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the deficit period.
459
Claim to set off deficit against profits of deficit period or earlier periods
(1)
The company may make a claim for the whole or part of the deficit—
(a)
to be set off against the total profits of the company for the deficit
period, or
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(b)
to be carried back to be set off against profits for earlier accounting
periods.

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Part 5 — Loan Relationships
Chapter 16 — Non-trading deficits
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(2)
No claim may be made under subsection (1) in respect of a deficit which is
surrendered as group relief under section 403 of ICTA.
(3)
Subsection (1) does not apply if the company is a charity.
(4)
For time limits and other provisions applicable to claims under subsection (1),
see section 460.
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(5)
For what happens when a claim is made under subsection (1)(a), see section
461.
(6)
For what happens when a claim is made under subsection (1)(b), and for the
profits available for relief where such a claim is made, see sections 462 and 463.
460
Time limits and procedure for claims under section 459(1)
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(1)
A claim under section 459(1) must be made within—
(a)
the period of 2 years after the deficit period ends, or
(b)
such further period as an officer of Revenue and Customs allows.
(2)
Different claims may be made in respect of different parts of a non-trading
deficit for any deficit period.
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(3)
But no claim may be made in respect of any part of a deficit to which another
such claim relates.
461
Claim to set off deficit against other profits for the deficit period
(1)
This section applies if a claim is made under section 459(1)(a) for the whole or
part of the deficit to be set off against profits for the deficit period.
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(2)
The general rule is that the amount to which the claim relates must be set off
against the profits of the company for the deficit period which are identified in
the claim.
(3)
Those profits are reduced accordingly.
(4)
The general rule is subject to subsections (5) and (7).
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(5)
Relief for any deficit incurred in a trade in an earlier accounting period must
be given before relief under this section.
(6)
But relief under this section must be given before relief is given against profits
for the deficit period—
(a)
under section 392A(1) or 393A(1) of ICTA (losses set against profits for
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the same or earlier accounting periods), or
(b)
as a result of a claim under section 459(1)(b) (carry-back) in respect of a
deficit for a later period.
(7)
No relief may be given under this section against ring fence profits of the
company within the meaning of Chapter 5 of Part 12 of ICTA (petroleum
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extraction activities).
462
Claim to carry back deficit to earlier accounting periods
(1)
This section applies if a claim is made under 459(1)(b) for the whole or part of
the deficit to be carried back to be set off against profits for accounting periods
before the deficit period.
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