Corporation Tax Bill

House of Commons

Session 2008 - 09
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Corporation Tax Bill

Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 4 — Further provision about credits and debits to be brought into account
296

615
Change of accounting policy after ceasing to be party to derivative contract
(1)
This section applies if—
(a)
the company has ceased to be a party to a derivative contract in an
accounting period (“the cessation period”),
(b)
section 608 (credits and debits to be brought into account in respect of
5
profits and losses arising in the cessation period) applied to the
cessation, and
(c)
there is a difference between the amount outstanding in respect of the
derivative contract (see subsection (5))—
(i)
at the end of the earlier period, and
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(ii)
at the beginning of the later period.
(2)
If that amount has increased, a credit of an amount equal to the increase must
be brought into account in accordance with this Part for the later period.
(3)
If that amount has decreased, a debit of an amount equal to the decrease must
be brought into account in accordance with this Part for the later period.
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(4)
Subsections (2) and (3) do not apply so far as the credit or debit falls to be
brought into account apart from this section.
(5)
In subsection (1) “the amount outstanding in respect of the derivative contract”
means so much of the recognised deferred income or recognised deferred loss
from the derivative contract as has not been represented by credits or debits
20
brought into account in accordance with this Part in respect of the contract.
(6)
In subsection (5)—
“recognised deferred income”, in relation to a derivative contract, means
the amount recognised in the company’s balance sheet in accordance
with generally accepted accounting practice as deferred income in
25
respect of the profits which arose from the contract or a related
transaction in the cessation period, and
“recognised deferred loss”, in relation to a derivative contract, means the
amount so recognised as deferred loss in respect of the losses which so
arose.
30
Certain embedded derivatives
616
Disapplication of fair value accounting
(1)
This section applies if—
(a)
a company is treated as a party to a relevant contract under section
584(2)(a) or 586(2) (“the embedded derivative”),
35
(b)
the embedded derivative is a derivative contract which meets the
condition in section 579(1)(a) (contract treated for accounting purposes
as derivative),
(c)
section 592 (embedded derivatives treated as meeting condition in
section 591 etc) does not apply in relation to the embedded derivative,
40
and
(d)
regulation 9 of the Disregard Regulations (interest rate contracts) does
not apply to the embedded derivative.
(2)
If this section applies—

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Part 7 — Derivative contracts
Chapter 4 — Further provision about credits and debits to be brought into account
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(a)
sections 573 and 574 (trading credits and debits to be brought into
account under Part 3 and non-trading credits and debits to be brought
into account under Part 5) do not apply in relation to the embedded
derivative, and
(b)
subsection (3) or subsections (4) to (6) apply in relation to the original
5
contract, depending on whether that contract is a hybrid derivative or
a contract within section 586(1).
(3)
If the original contract is a hybrid derivative, profits and losses are to be
calculated for the purposes of this Part as if that contract—
(a)
were not one where the rights and liabilities are treated for accounting
10
purposes as divided as mentioned in section 584(1) (hybrid derivatives
with embedded derivatives), and
(b)
were not one in relation to which a fair value basis of accounting is
used.
(4)
If the original contract is a contract within section 586(1), profits and losses are
15
to be brought into account for the purposes of the Corporation Tax Acts in
relation to that contract as if that contract—
(a)
were not one where the rights and liabilities are treated for accounting
purposes as divided as mentioned in section 586(1) (other contracts
with embedded derivatives), and
20
(b)
were not one in relation to which a fair value basis of accounting is
used.
(5)
Accordingly, this Part does not apply to the original contract (except for the
purposes of this section), but section 46 applies to that contract as if fair value
accounting were not generally accepted accounting practice in relation to the
25
company.
(6)
Subsections (4) and (5) apply despite section 699(1) (priority of this Part for
corporation tax purposes).
(7)
In this section—
“the Disregard Regulations” means the Loan Relationships and
30
Derivative Contracts (Disregard and Bringing into Account of Profits
and Losses) Regulations 2004 (S.I. 2004/3256), and
“the original contract” means—
(a)
the hybrid derivative as a result of which the company falls to
be treated under section 584(2) (hybrid derivatives with
35
embedded derivatives) as a party to the embedded derivative,
or
(b)
the contract within section 586(1) (other contracts with
embedded derivatives) as a result of which the company falls to
be treated under section 586(2) as a party to the embedded
40
derivative.
617
Election for section 616 not to apply
(1)
A company may elect that section 616 is not to apply in relation to its contracts.
(2)
But such an election does not apply to a contract if—
(a)
the contract is a contract of long-term insurance, or
45
(b)
the underlying subject matter of the embedded derivative is, or
includes, commodities.

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Part 7 — Derivative contracts
Chapter 4 — Further provision about credits and debits to be brought into account
298

(3)
An election under this section—
(a)
must be made before the end of the first applicable accounting period
of the company, and
(b)
is irrevocable.
(4)
In subsection (3) “the first applicable accounting period” means the first
5
accounting period in which the conditions in section 616(1) are met.
(5)
Section 618 makes further provision about elections under this section.
618
Elections under section 617: groups of companies
(1)
If—
(a)
a company makes an election under section 617 in relation to its
10
contracts, and
(b)
another company, which is a member of the same group as the
company making the election, is a party to a contract to which the
election applies,

the other company is treated, in relation to that contract, as if it had also made
15
such an election.
(2)
If—
(a)
a company (“the electing company”) makes an election under section
617 in relation to its contracts,
(b)
another company (“the transferee”) becomes a party to a contract to
20
which section 584 (hybrid derivatives with embedded derivatives) or
section 586 (other contracts with embedded derivatives) applies, in
place of the electing company (whether before or after the election is
made), and
(c)
the transferee is a member of the same group of companies as the
25
electing company at the time of the transfer,

the transferee is treated, in relation to the contract mentioned in paragraph (b),
as if it had also made such an election.
(3)
If—
(a)
a company (“A”) is treated under section 584 or 586 as a party to a
30
relevant contract in relation to which section 616(1) applies,
(b)
another company (“B”) becomes a party to that contract in place of A,
(c)
A and B are members of the same group of companies when B becomes
a party to the contract, and
(d)
section 616(1) does not apply in relation to B’s other relevant contracts
35
because of an election under section 617 (whenever made),

subsection (4) applies, unless A, subsequent to B’s becoming a party to the
contract, makes such an election.
(4)
B is treated, in relation to the contract mentioned in subsection (3)(b), as if
section 616(1) applied in relation to it.
40
(5)
In this section, references to a company being a member of the same group of
companies are to be read in accordance with section 170 of TCGA 1992
(interpretation of sections 171 to 181 of that Act: groups).

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Part 7 — Derivative contracts
Chapter 4 — Further provision about credits and debits to be brought into account
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Partnerships involving companies
619
Partnerships involving companies
(1)
This section applies if—
(a)
a trade or business is carried on by a firm,
(b)
any of the partners in the firm is a company (a “company partner”), and
5
(c)
the firm is a party to a contract which is a derivative contract or would
be a derivative contract if the firm were a company.
(2)
No credits or debits may be brought into account in accordance with this Part
in respect of the contract in calculating the profits and losses of the trade or
business for corporation tax purposes under section 1259 (calculation of firm’s
10
profits and losses).
(3)
Instead, each company partner must bring into account in accordance with this
Part credits and debits in respect of the contract for each of its accounting
periods in which the conditions in subsection (1) are met.
(4)
Sections 620 (determination of credits and debits by company partners) and
15
621 (company partners using fair value accounting) contain special rules about
the credits and debits to be brought into account under subsection (3).
(5)
In sections 620 and 621 “company partner” has the same meaning as in this
section.
620
Determination of credits and debits by company partners
20
(1)
The credits and debits to be brought into account under section 619 (3) are to be
determined separately for each company partner as follows.
(2)
The contract entered into or acquired by the firm is treated as if it were instead
entered into or acquired by the company partner for the purposes of the trade
or business which the company partner carries on.
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(3)
Anything done by or in relation to the firm in connection with the contract is
treated as done by or in relation to the company partner.
(4)
So far as exchange gains or losses arising from the contract are recognised in
the firm’s—
(a)
statement of total recognised gains and losses,
30
(b)
statement of recognised income and expense,
(c)
statement of changes in equity, or
(d)
statement of income and retained earnings,

they are treated as if they had been recognised in the corresponding statement
of the company partner.
35
(5)
The credits and debits in the case of each company partner are the partner’s
appropriate share of the total credits and debits determined in accordance with
subsections (2) to (4).
(6)
A company partner’s “appropriate share” is the share which would be
apportioned to it on the assumption in subsection (7).
40
(7)
The assumption is that the total credits and debits determined in accordance
with subsections (2) to (4) are apportioned between the partners in the shares

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Part 7 — Derivative contracts
Chapter 4 — Further provision about credits and debits to be brought into account
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in which any profit or loss would be apportioned between them in accordance
with the firm’s profit-sharing arrangements.
621
Company partners using fair value accounting
(1)
This section applies if a company partner uses fair value accounting in relation
to its interest in the firm.
5
(2)
The credits and debits to be brought into account by the company partner
under section 619(3) are to be determined on the basis of fair value accounting.
Miscellaneous
622
Contracts ceasing to be derivative contracts
(1)
This section applies if a company is a party to a relevant contract which ceases
10
to be a derivative contract.
(2)
The company is treated for the purposes of this Part as if it had disposed of the
contract in a related transaction at the relevant time for consideration of an
amount equal to the notional carrying value of the contract at that time.
(3)
In this section “the relevant time” means the time when the contract ceases to
15
be a derivative contract.
(4)
For the purposes of this section, the “notional carrying value” of the contract at
the relevant time is the amount which would have been the carrying value of
the contract in the accounts of the company if a period of account had ended
immediately before that time.
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(5)
See also section 662 (chargeable gains provision for contracts ceasing to be
derivative contracts).
623
Index-linked gilt-edged securities with embedded contracts for differences
(1)
This section applies to a derivative contract of a company for an accounting
period if each of conditions A to D is met.
25
(2)
Condition A is that the derivative contract is a relevant contract to which the
company is treated as a party under section 585(2) (loan relationships with
embedded derivatives) because of a creditor relationship of the company.
(3)
Condition B is that the derivative contract is treated as a contract for differences
by section 585(3) (contract treated as option, future or contract for differences).
30
(4)
Condition C is that the creditor relationship is an index-linked gilt-edged
security.
(5)
Condition D is that the credits and debits which fall to be brought into account
for the accounting period for the purposes of Part 5 (loan relationships) in
respect of the host contract are non-trading credits and non-trading debits.
35
(6)
The credits and debits which would fall to be brought into account in
accordance with this Part in respect of the derivative contract for the
accounting period apart from this section may not be so brought into account.
(7)
In this section—

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Part 7 — Derivative contracts
Chapter 5 — Continuity of treatment on transfers within groups
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“the host contract” means the loan relationship to which the company is
treated as a party under section 415(2) (loan relationships with
embedded derivatives) because of the creditor relationship mentioned
in subsection (2), and
“index-linked gilt-edged security” has the same meaning as in Part 5 (see
5
section 399(4)).
Chapter 5
Continuity of treatment on transfers within groups
Introductory
624
Introduction to Chapter
10
(1)
This Chapter makes provision—
(a)
about continuity of treatment in some cases in which a company
replaces a member of the same group of companies as a party to a
derivative contract, and
(b)
about cases in which the company ceases to be a member of the group.
15
(2)
For the meaning of references in this Chapter to a company replacing another
as a party to a derivative contract, see section 627.
(3)
In this Chapter, references to a company being a member of a group of
companies are to be read in accordance with section 170 of TCGA 1992
(interpretation of sections 171 to 181 of that Act: groups).
20
(4)
For modifications of this Chapter for insurance companies, see section 636.
Group member replacing another as party to derivative contract
625
Group member replacing another as party to derivative contract
(1)
This section applies if—
(a)
there is a transaction within section 626(2) or a series of transactions
25
within section 626(3),
(b)
as a result one of the companies involved (“the transferee”) directly or
indirectly replaces the other (“the transferor”) as a party to a derivative
contract.
(2)
The credits and debits to be brought into account in accordance with this Part
30
in respect of the derivative contract are determined in accordance with
subsections (3) to (5).
(3)
For the accounting period in which the transaction or, as the case may be, the
first of the transactions takes place, the transferor is treated as having entered
into that transaction for consideration of an amount equal to the notional
35
carrying value of the contract (see subsection (6)).
(4)
For any accounting period in which the transferee is a party to the contract, it
is treated as if it had acquired the contract for consideration of an amount equal
to its notional carrying value.

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(5)
If a discount arises in respect of the transaction or series of transactions, the
consideration is increased for the purposes of subsection (3) (but not subsection
(4)) by the amount of the discount.
(6)
For the purposes of this section—
(a)
“discount” has same meaning as in section 480 (relevant non-lending
5
relationships involving discounts), and
(b)
the notional carrying value of a contract is the amount which would
have been its carrying value in the accounts of the transferor if a period
of account had ended immediately before the date when the transferor
ceased to be a party to the contract.
10
(7)
Schedule 28AA to ICTA (provision not at arm’s length) does not apply in
relation to the amounts in respect of which credits or debits are to be brought
into account under this section.
(8)
This section is subject to sections 628 (transferor using fair value accounting)
and 629 (tax avoidance).
15
626
Transactions to which section 625 applies
(1)
This section applies for the purposes of section 625(1)(a).
(2)
A transaction is within this subsection if it is a related transaction between two
companies which are—
(a)
members of the same group, and
20
(b)
within the charge to corporation tax in respect of that transaction.
(3)
A series of transactions is within this subsection if it is a series of transactions
having the same effect as a related transaction between two companies each of
which—
(a)
has been a member of the same group at any time in the course of that
25
series of transactions, and
(b)
would be within the charge to corporation tax in respect of such a
related transaction.
627
Meaning of company replacing another as party to derivative contract
(1)
References in this Chapter to one company (“A”) replacing another company
30
(“B”) as a party to a derivative contract include references to A becoming a
party to a derivative contract which—
(a)
confers rights within subsection (2),
(b)
imposes liabilities within subsection (2), or
(c)
both confers such rights and imposes such liabilities.
35
(2)
Rights or liabilities are within this subsection if they are equivalent to those of
B under a derivative contract to which B has previously ceased to be a party.
Exceptions to section 625
628
Transferor using fair value accounting
(1)
This section applies instead of section 625 if, in a case where that section would
40
otherwise apply, the transferor uses fair value accounting as respects the
derivative contract.