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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),

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(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

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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—

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(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

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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

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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

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(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),

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(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”

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(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

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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.

 
 

 
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