Corporation Tax Bill

House of Commons

Session 2008 - 09
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Other Bills before Parliament

Corporation Tax Bill

Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 2 — Contracts to which this Part applies
286

592
Embedded derivatives treated as meeting condition in section 591 etc
(1)
This section applies if for an accounting period—
(a)
a company is a party to a hybrid derivative which meets the condition
in section 579(1)(b) (contract which is or forms part of a financial asset
or liability for accounting purposes),
5
(b)
the embedded derivative is a relevant contract which meets the
condition in section 579(1)(a) (contract treated for accounting purposes
as derivative),
(c)
the underlying subject matter of that contract consists, or is treated as
consisting, wholly of—
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(i)
shares in a company, or
(ii)
rights of a unit holder under a unit trust scheme, and
(d)
the host contract is or forms part of a financial asset or liability for
accounting purposes.
(2)
The embedded derivative is treated—
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(a)
for the purposes of section 589 (contracts excluded because of
underlying subject matter: general) as meeting one of the conditions in
section 591, and
(b)
as a chargeable asset.
(3)
The host contract is treated for the purposes of the Corporation Tax Acts as if
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it were a creditor relationship of the company (see Part 5 (loan relationships)).
(4)
Section 590 (disregard of subordinate or small value underlying subject matter)
applies for the purpose of determining whether the underlying subject matter
is to be treated as consisting wholly of property mentioned in subsection (1)(c)
as that section so applies in relation to excluded property.
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(5)
In this section—
“the embedded derivative” means the relevant contract to which the
company is treated as a party under section 584(2)(a) because of the
hybrid derivative mentioned in subsection (1)(a), and
“the host contract” means the relevant contract to which the company is
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treated as a party under section 584(2)(b) because of that hybrid
derivative.
593
Contracts where part of underlying subject matter is excluded property
(1)
This section applies to a relevant contract of a company—
(a)
which is an option or future,
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(b)
which meets any of the accounting conditions in section 579(1), and
(c)
whose underlying subject matter consists of—
(i)
excluded property, and
(ii)
other underlying subject matter.
(2)
A relevant contract to which this section applies is treated for the purposes of
40
the Corporation Tax Acts as if it were the following two contracts—
(a)
a relevant contract whose underlying subject matter consists of the
excluded property, and
(b)
a relevant contract whose underlying subject matter consists of the
other underlying subject matter.
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Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 3 — Credits and debits to be brought into account: general
287

(3)
For the purposes of giving effect to subsection (2), all such apportionments as
are just and reasonable are to be made.
(4)
This section does not apply to a relevant contract if it is determined in
accordance with section 590 (disregard of subordinate or small value
underlying subject matter) that the underlying subject matter of the relevant
5
contract is to be treated as consisting wholly of excluded property.
(5)
In this section “excluded property” has the same meaning as in section 589
(contracts excluded because of underlying subject matter: general).
Chapter 3
Credits and debits to be brought into account: general
10
Introduction
594
Overview of Chapter
(1)
This Chapter contains rules of general application about the credits and debits
to be brought into account for the purposes of this Part.
(2)
In particular, it—
15
(a)
sets out the general principles which are to apply in relation to the
bringing into account of credits and debits, including the use of
generally accepted accounting practice and the taking into account of
related transactions (see sections 595 and 596),
(b)
makes provision about the interpretation of the expression “amounts
20
recognised in determining a company’s profit or loss” (see sections 597
to 599),
(c)
makes provision in relation to the application of fair value accounting
(see sections 600 to 603),
(d)
sets out some general rules which differ from generally accepted
25
accounting practice (see sections 604 and 605),
(e)
makes provision about exchange gains and losses (see section 606),
(f)
makes provision about pre-contract or abortive expenses (see section
607),
(g)
makes provision about companies ceasing to be parties to derivative
30
contracts and companies moving abroad (see sections 608 to 610), and
(h)
makes provision in relation to statutory insolvency arrangements (see
section 611).
General principles
595
General principles about the bringing into account of credits and debits
35
(1)
This Part operates by reference to the accounts of companies and amounts
recognised for accounting purposes in those accounts.
(2)
The general rule is that the amounts to be brought into account by a company
as credits or debits for any period for the purposes of this Part are those which
are recognised in determining the company’s profit or loss for the period in
40

Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 3 — Credits and debits to be brought into account: general
288

accordance with generally accepted accounting practice (but this is subject to
subsections (3) and (4)).
(3)
The credits and debits to be brought into account in respect of a company’s
derivative contracts are the amounts which, when taken together, fairly
represent for the accounting period in question—
5
(a)
all profits and losses of the company which arise to it from its derivative
contracts and related transactions (excluding expenses), and
(b)
all expenses incurred by the company under or for the purposes of
those contracts and transactions.
(4)
Expenses are only treated as incurred as mentioned in subsection (3)(b) if they
10
are incurred directly—
(a)
in bringing any of the derivative contracts into existence,
(b)
in entering into or giving effect to any of the related transactions,
(c)
in making payments under any of those contracts or as a result of any
of those transactions, or
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(d)
in taking steps to ensure the receipt of payments under any of those
contracts or in accordance with any of those transactions.
(5)
For the treatment of pre-contract or abortive expenses, see section 607.
(6)
In subsection (3) “profits and losses” includes profits and losses of a capital
nature.
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(7)
This section is subject to the following provisions of this Part.
(8)
For the meaning of “related transaction” see section 596.
596
Meaning of “related transaction”
(1)
In this Part “related transaction”, in relation to a derivative contract, means any
disposal or acquisition (in whole or in part) of rights or liabilities under the
25
contract.
(2)
For this purpose the cases where there is taken to be such a disposal or
acquisition include—
(a)
those where rights or liabilities under the derivative contract are
transferred or extinguished by any sale, gift, surrender or release, and
30
(b)
those where the contract is discharged by performance in accordance
with its terms.
Amounts recognised in determining a company’s profit or loss
597
Amounts recognised in determining a company’s profit or loss
(1)
References in this Part to an amount recognised in determining a company’s
35
profit or loss for a period are 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,
statement of recognised income and expense, statement of changes in
40
equity or statement of income and retained earnings for that period, or
(c)
any other statement of items recognised in calculating the company’s
profits and losses for that period.

Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 3 — Credits and debits to be brought into account: general
289

(2)
If, in accordance with generally accepted accounting practice, an amount is
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.
(3)
Subsection (2) does not apply to an amount recognised for accounting
5
purposes by way of correction of a fundamental error.
598
Regulations about recognised amounts
(1)
The Treasury may by regulations make provision—
(a)
excluding amounts of a specified description from section 597(1)
(amounts recognised in determining a company’s profit or loss),
10
(b)
requiring amounts of a specified description which are not within
section 597(1) to be brought into account in determining a company’s
profit or loss for a period in specified circumstances, and
(c)
as to the way in which any such amounts are to be brought into
account.
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(2)
For the purposes of subsection (1)(b), it does not matter whether the amounts
are not within section 597(1) because of regulations under subsection (1)(a) or
otherwise.
(3)
The regulations may (in particular) make provision by reference to the fact that
amounts derive from or otherwise relate to amounts brought into account in a
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specified way in a previous period of account.
(4)
The regulations may—
(a)
make different provision for different cases, and
(b)
make provision subject to an election or to other specified conditions.
(5)
The regulations may apply, exclude or modify any of the provisions of this Part
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in relation to cases for which provision is made by the regulations.
(6)
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.
599
Meaning of “amounts recognised for accounting purposes”
30
(1)
If a company—
(a)
draws up accounts which are not GAAP-compliant accounts, or
(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
35
purposes include references to the amounts which would have been
recognised if GAAP-compliant accounts had been drawn up for the period of
account in 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
40
period.
(4)
In this section “GAAP-compliant accounts” means accounts drawn up in
accordance with generally accepted accounting practice.