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 3 — Credits and debits to be brought into account: general
290

Application of fair value accounting
600
Contract which is or forms part of financial asset or liability
(1)
This section applies to a derivative contract 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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(2)
The amounts to be brought into account in accordance with this Part in respect
of the contract are to be determined on the basis of fair value accounting.
601
Contract relating to holding in OEIC, unit trust or offshore fund
(1)
This section applies if a company is a party in an accounting period to a
relevant contract which is treated as a derivative contract under section 587
10
(contract relating to holding in OEIC, unit trust or offshore fund).
(2)
The credits and debits which are to be brought into account in accordance with
this Part in respect of the relevant contract are to be determined on the basis of
fair value accounting.
602
Contract becoming one relating to holding in OEIC, unit trust or offshore
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fund
(1)
This section applies if—
(a)
a company is a party to a relevant contract in two successive accounting
periods,
(b)
section 587 (contract relating to holding in OEIC, unit trust or offshore
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fund) applies in relation to the relevant contract for the second
accounting period but not the first accounting period, and
(c)
immediately before the beginning of the second accounting period the
relevant contract was a chargeable asset.
(2)
For the purposes of section 601(2), the opening valuation of the contract as at
25
the beginning of the second accounting period is taken to be equal to the
market value of the contract.
(3)
In subsection (2) “the market value of the contract” means the amount which
would have been the market value of the contract for the purposes of
corporation tax on chargeable gains if it had been disposed of immediately
30
before the end of the first accounting period.
(4)
For the rules which apply where the company ceases to be a party to the
contract, see section 660 (company ceasing to be party to contract relating to
holding in OEIC, unit trust or offshore fund).
603
Associated transaction treated as derivative contract
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(1)
This section is to be read as if it were in Chapter 7 (shares with guaranteed
returns etc) of Part 6 (relationships treated as loan relationships etc).
(2)
See, in particular, section 532(3) (meaning of “associated transaction”).
(3)
Subsection (4) applies if credits and debits are required to be brought into
account in accordance with this Part in respect of any associated transaction
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Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 3 — Credits and debits to be brought into account: general
291

because of section 588 (which treats such a transaction which is not a derivative
contract as if it were).
(4)
Those credits and debits are to be determined on the basis of fair value
accounting.
Rules differing from generally accepted accounting practice
5
604
Credits and debits treated as relating to capital expenditure
(1)
This section applies if generally accepted accounting practice allows a credit or
debit for an accounting period in respect of a company’s derivative contract to
be treated in the company’s accounts as an amount recognised in determining
the value of a fixed capital asset or project.
10
(2)
Despite that treatment, the credit or debit must be brought into account in
accordance with this Part, in the accounting period for which it is given, in the
same way as a credit or debit which is recognised in determining the
company’s profit or loss for that period in accordance with generally accepted
accounting practice.
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(3)
But subsection (2) does not apply to a debit which is recognised in arriving at
the amount of expenditure in relation to which a debit may be given by Part 8
(intangible fixed assets).
(4)
Subsection (5) applies if a debit is recognised as mentioned in subsection (1).
(5)
No debit may be brought into account in accordance with this Part in respect
20
of—
(a)
the writing down of so much of the value of the asset or project, or
(b)
so much of any amortisation or depreciation as represents a writing off of that
value,

as is attributable to that debit.
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605
Credits and debits recognised in equity
(1)
This section applies if in accordance with generally accepted accounting
practice a credit or debit for a period in respect of a company’s derivative
contract—
(a)
is recognised in equity, and
30
(b)
is not recognised in any of the statements mentioned in section 597(1)
(amounts recognised in determining a company’s profit or loss).
(2)
The credit or debit must be brought into account for the period in accordance
with this Part in the same way as a credit or debit which is recognised in
determining the company’s profit or loss for the period in accordance with
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generally accepted accounting practice.
Miscellaneous
606
Exchange gains and losses
(1)
The reference in section 595(3) to the profits and losses arising to a company
from its derivative contracts includes a reference to exchange gains and losses
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so arising.

Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 3 — Credits and debits to be brought into account: general
292

(2)
Subsection (1) is subject to subsections (3) and (4).
(3)
Subsection (1) does not apply to an exchange gain or loss of a company so far
as—
(a)
it arises—
(i)
in relation to a derivative contract whose underlying subject
5
matter consists wholly or partly of currency, or
(ii)
as a result of the translation from one currency to another of the
profit or loss of part of the company’s business, and
(b)
it is recognised in the company’s statement of total recognised gains
and losses, statement of recognised income and expense, statement of
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changes in equity or statement of income and retained earnings.
(4)
Subsection (1) does not apply to so much of an exchange gain or loss arising to
a company in relation to a derivative contract whose underlying subject matter
consists wholly or partly of currency as is within a description specified for the
purpose in regulations made by the Treasury.
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(5)
The Treasury may by regulations make provision for or in connection with
bringing into account in specified circumstances amounts to which subsection
(1) does not apply because of subsection (3) or (4).
(6)
The reference in subsection (5) to bringing amounts into account is a reference
to bringing amounts into account—
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(a)
for the purposes of this Part as credits or debits arising to a company
from its derivative contracts, or
(b)
for the purposes of corporation tax on chargeable gains.
(7)
The regulations may—
(a)
make different provision for different cases, and
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(b)
make provision subject to an election or to other specified conditions.
(8)
For the meaning of references to exchange gains or losses from derivative
contracts, see section 705.
607
Pre-contract or abortive expenses
(1)
This section applies if—
30
(a)
a company may enter into a derivative contract or related transaction
but has not yet done so,
(b)
it incurs any expenses for purposes connected—
(i)
with entering into it, or
(ii)
with giving effect to any obligation which might arise under it,
35
and
(c)
had the company entered into the contract or transaction, the expenses
would be expenses within section 595(3)(b).
(2)
The expenses are treated as expenses in relation to which debits may be
brought into account in accordance with section 595(3) to the same extent as if
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the company had entered into the contract or transaction.
608
Company ceasing to be party to derivative contract
(1)
This section applies if—

Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 3 — Credits and debits to be brought into account: general
293

(a)
a company ceases to be a party to a derivative contract in an accounting
period (the “cessation period”),
(b)
profits or losses arise to the company from the derivative contract or a
related transaction in that period, and
(c)
the credits or debits brought into account in accordance with this Part
5
for that period do not include credits or debits representing the whole
of those profits or losses.
(2)
Credits or debits in respect of so much of those profits or losses as are not
represented by credits or debits brought into account for the cessation period
must continue to be brought into account in accordance with this Part over one
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or more subsequent accounting periods (“post-cessation periods”) as in the
case of a derivative contract to which the company is a party in those periods.
(3)
Subsection (4) applies if any question arises how far in a post-cessation
period—
(a)
the company is a party to the derivative contract for the purposes of a
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trade it carries on, or
(b)
the derivative contract is referable to a particular business the company
carries on or a particular description of such business.
(4)
The question is to be determined by reference to the circumstances
immediately before the company ceased to be a party to the derivative
20
contract, instead of the circumstances in the post-cessation period.
(5)
Subsection (6) applies if any question arises—
(a)
how far the derivative contract has a particular purpose in a post-
cessation period, or
(b)
whether there is a connection between the company and any other
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person for a post-cessation period.
(6)
The question is to be determined by reference to the circumstances in the
cessation period, instead of the circumstances in the post-cessation period.
(7)
For the purposes of the Corporation Tax Acts, references to a person’s
derivative contracts and to a person being a party to a derivative contract are
30
to be read in accordance with this section.
609
Company ceasing to be UK resident
(1)
If a company ceases to be UK resident, this Part applies as if—
(a)
immediately before so ceasing the company had assigned the rights
and liabilities under its derivative contracts for consideration of an
35
amount equal to their fair value at that time, and
(b)
it had immediately reacquired them for consideration of the same
amount.
(2)
Subsection (1) does not apply in relation to a derivative contract so far as
immediately after the company ceases to be UK resident its rights and
40
liabilities under the contract are held or owed for the purposes of a permanent
establishment of the company in the United Kingdom.
(3)
Subsection (1) does not apply if—
(a)
section 631 or 632 applies in relation to the company (transferee leaving
group after replacing transferor as party to derivative contract), and
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Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 4 — Further provision about credits and debits to be brought into account
294

(b)
it ceases to be UK resident at the same time as it ceases to be a member
of the relevant group.
(4)
In subsection (3) “the relevant group” has the meaning given by section 630(4).
610
Non-UK resident company ceasing to hold derivative contract for UK
permanent establishment
5
(1)
This section applies if the rights and liabilities under a derivative contract of a
company which is not UK resident cease to any extent to be held or owed for
the purposes of a permanent establishment of the company in the United
Kingdom in circumstances not involving a related transaction.
(2)
This Part applies as if—
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(a)
immediately before the rights and liabilities so cease the company had
assigned them, so far as so ceasing, for consideration of an amount
equal to their fair value at that time, and
(b)
the company had immediately reacquired them for consideration of the
same amount.
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(3)
This section does not apply if—
(a)
section 631 or 632 applies in relation to the company (transferee leaving
group after replacing transferor as party to derivative contract), and
(b)
the rights and liabilities mentioned in subsection (1) cease to be held or
owed for the purposes of the permanent establishment at the same time
20
as the company ceases to be a member of the relevant group.
(4)
In subsection (3) “the relevant group” has the meaning given by section 630(4).
611
Release under statutory insolvency arrangement of liability under derivative
contract
No credit is required to be brought into account by a company in respect of the
25
release of the company’s liability to pay an amount under a derivative contract
of the company if the release is part of a statutory insolvency arrangement.
Chapter 4
Further provision about credits and debits to be brought into account
Introduction
30
612
Overview of Chapter
(1)
This Chapter makes further provision about the credits and debits to be
brought into account for the purposes of this Part.
(2)
In particular, it—
(a)
provides for adjustments on a change of accounting policy (see sections
35
613 to 615),
(b)
makes provision in relation to certain embedded derivatives (see
sections 616 to 618),
(c)
makes provision about partnerships involving companies (see sections
619 to 621),
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Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 4 — Further provision about credits and debits to be brought into account
295

(d)
makes provision about contracts ceasing to be derivative contracts (see
section 622), and
(e)
makes provision in relation to some gilt-edged securities (see section
623).
Adjustments on change of accounting policy
5
613
Introduction to sections 614 and 615
(1)
Sections 614 and 615 (adjustments on change of accounting policy) apply if—
(a)
there is a change of accounting policy in drawing up a company’s
accounts from one period of account to the next, and
(b)
the accounting policy in each of those periods accords with the law and
10
practice applicable in relation to that period.
(2)
In this section and those sections—
(a)
the first of those periods of account is referred to as “the earlier period”,
and
(b)
the next is referred to as “the later period”.
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(3)
Sections 614 and 615 apply, in particular, if—
(a)
the company prepares accounts for the earlier period in accordance
with UK generally accepted accounting practice and for the later period
in accordance with international accounting standards, or
(b)
the company prepares accounts for the earlier period in accordance
20
with international accounting standards and for the later period in
accordance with UK generally accepted accounting practice.
(4)
If an election is made under section 416, this section and sections 614 and 615
apply as if there were a change of accounting policy consisting of the company
treating the assets referred to in section 416(1)(c) as mentioned in section 585(1)
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as from the date the election has effect.
614
Change of accounting policy involving change of value
(1)
If there is an increase in the carrying value of a derivative contract of the
company between—
(a)
the end of the earlier period, and
30
(b)
the beginning of the later period,

a credit of an amount equal to the increase must be brought into account in
accordance with this Part for the later period.
(2)
If there is a decrease in the carrying value of such a derivative contract
between—
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(a)
the end of the earlier period, and
(b)
the beginning of the later period,

a debit of an amount equal to the decrease must be brought into account in
accordance with this Part for the later period.
(3)
This section does not apply so far as such a credit or debit as is mentioned in
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this section falls to be brought into account apart from this section.