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Corporation Tax Bill


Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 7 — Chargeable gains arising in relation to derivative contracts

308

 

638     

Venture capital trusts: profits or losses of a capital nature

(1)   

Profits or losses of a capital nature arising to a venture capital trust from a

derivative contract may not be brought into account as credits or debits in

accordance with this Part.

(2)   

For the purposes of this section, “profits or losses of a capital nature” means

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profits or losses which—

(a)   

are accounted for through the capital column of the income statement

in accordance with the Statement of Recommended Practice, or

(b)   

would have been so accounted for if the venture capital trust had been

an investment trust and that Statement had been applied correctly.

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(3)   

In this section “the Statement of Recommended Practice” has the meaning

given by section 637(3) (investment trusts: profits or losses of a capital nature).

(4)   

The Treasury may by order amend the definition of “profits or losses of a

capital nature” in subsection (2), so far as it applies in relation to a venture

capital trust which prepares accounts in accordance with international

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accounting standards.

Chapter 7

Chargeable gains arising in relation to derivative contracts

Introduction

639     

Overview of Chapter

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(1)   

This Chapter makes provision about cases in which—

(a)   

credits and debits are not to be brought into account in accordance with

section 574 (non-trading credits and debits to be brought into account

under Part 5: loan relationships) (see sections 640 and 643 to 650), but

(b)   

instead profits arising to a company from its derivative contracts are

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chargeable to corporation tax as chargeable gains (see sections 641 to

650).

(2)   

This Chapter also makes provision about cases in which—

(a)   

credits and debits are not to be brought into account in accordance with

section 573 (trading credits and debits to be brought into account under

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Part 3: trading income) or section 574 (non-trading credits and debits to

be brought into under Part 5: loan relationships) (see section 651), but

(b)   

instead provisions relating to corporation tax on chargeable gains

apply in relation to derivative contracts (see sections 652 to 658).

Some credits and debits not to be brought into account under Part 5

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640     

Credits and debits not to be brought into account under Part 5

(1)   

If any of the provisions in subsection (2) applies to a derivative contract of a

company for an accounting period, section 574 (non-trading credits and debits

to be brought into account under Part 5: loan relationships) does not apply to

the relevant credits and debits.

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Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 7 — Chargeable gains arising in relation to derivative contracts

309

 

(2)   

The provisions are—

(a)   

section 643 (contracts relating to land or certain tangible movable

property),

(b)   

section 645 (creditor relationships: embedded derivatives which are

options),

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(c)   

section 648 (creditor relationships: embedded derivatives which are

exactly tracking contracts for differences), and

(d)   

section 650 (property based total return swaps).

(3)   

For the meaning of “relevant credits” and “relevant debits”, see section 659.

(4)   

For the treatment of the relevant credits and debits in the case of a derivative

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contract to which section 643, 645, 648 or 650 applies, see section 641 (derivative

contracts to be taxed on a chargeable gains basis).

Some derivative contracts to be taxed on a chargeable gains basis

641     

Derivative contracts to be taxed on a chargeable gains basis

(1)   

This section applies to a derivative contract of a company for an accounting

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period if any of the provisions in subsection (2) applies to the derivative

contract for the period.

(2)   

The provisions are—

(a)   

section 643 (contracts relating to land or certain tangible movable

property),

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(b)   

section 645 (creditor relationships: embedded derivatives which are

options),

(c)   

section 648 (creditor relationships: embedded derivatives which are

exactly tracking contracts for differences), and

(d)   

section 650 (property based total return swaps).

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(3)   

For the purposes of corporation tax on chargeable gains—

(a)   

if C exceeds D, a chargeable gain equal to the amount of the excess is

treated as accruing to the company in the accounting period,

(b)   

if D exceeds C, an allowable loss equal to the amount of the excess is

treated as accruing to the company in the accounting period.

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(4)   

“C” means the sum of the relevant credits for the accounting period in respect

of the derivative contract.

(5)   

“D” means the sum of the relevant debits for the accounting period in respect

of the derivative contract.

(6)   

For a case in which this section does not apply, see section 642.

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(7)   

See also section 663 (carry back of net losses on derivative contracts to which

this section applies).

642     

Exception from section 641

(1)   

Section 641 does not apply to a derivative contract to which section 645 applies

if, on the assumptions in subsection (2), paragraph 2 of Schedule 7AC to TCGA

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1992 (substantial shareholding exemptions: gain on disposal of asset related to

 
 

Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 7 — Chargeable gains arising in relation to derivative contracts

310

 

shares not a chargeable gain) would apply to the gain mentioned in subsection

(2)(d).

(2)   

Those assumptions are that—

(a)   

the rights and liabilities treated as comprised in the derivative contract

were contained in a separate contract,

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(b)   

that separate contract was an option,

(c)   

that option was disposed of at the end of the accounting period, and

(d)   

a gain accrued to the company on the disposal for the purposes of

corporation tax on chargeable gains.

Derivative contracts to which sections 640 and 641 apply

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643     

Contracts relating to land or certain tangible movable property

(1)   

This section applies to a derivative contract of a company for an accounting

period if conditions A, B and C are met.

(2)   

Condition A is that the underlying subject matter of the derivative contract

consists of either or both of the following—

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(a)   

land,

(b)   

tangible movable property, other than commodities which are tangible

assets.

(3)   

Condition B is that the company is not a party to the derivative contract at any

time in the accounting period for the purposes of a trade carried on by it.

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(4)   

Condition C is that the company is not an excluded body.

(5)   

For the case where the underlying subject matter of a derivative contract also

includes income from property within subsection (2)(a) or (b), see section 644.

644     

Income to be left out of account in determining whether section 643 applies

(1)   

This section applies if the underlying subject matter of a derivative contract

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includes income from property within section 643(2)(a) or (b).

(2)   

If that income is subordinate income, it is left out of account in determining for

the purposes of section 643 whether condition A is met.

(3)   

Income is “subordinate income” if it is—

(a)   

subordinate in relation to so much of the underlying subject matter of

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the derivative contract as consists of property within section 643(2)(a)

or (b), or

(b)   

of small value in comparison with the value of the underlying subject

matter as a whole.

(4)   

For the purposes of this section, whether part of the underlying subject matter

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of a derivative contract of a company is subordinate or of small value is to be

determined by reference to the time when the company enters into or acquires

the contract.

 
 

Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 7 — Chargeable gains arising in relation to derivative contracts

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645     

Creditor relationships: embedded derivatives which are options

(1)   

This section applies to a derivative contract of a company for an accounting

period if each of conditions A to E is met.

(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

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embedded derivatives) because of a creditor relationship of the company.

(3)   

Condition B is that the derivative contract is treated as an option by section

585(3) (contract treated as option, future or contract for differences).

(4)   

Condition C is that the underlying subject matter of the derivative contract—

(a)   

is qualifying ordinary shares, or

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(b)   

is mandatorily convertible preference shares.

(5)   

Condition D is that the company is not a party to the creditor relationship at

any time in the accounting period for the purposes of a trade carried on by it.

(6)   

Condition E is that the company is not an excluded body.

(7)   

Where this section applies to a derivative contract, the asset representing the

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creditor relationship is treated for corporation tax purposes as not being a

qualifying corporate bond.

(8)   

See also—

(a)   

section 647 (meaning of certain expressions in this section), and

(b)   

section 670 (treatment of net gains and losses on exercise of option).

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646     

Exclusions from section 645

(1)   

Section 645 does not apply to a derivative contract of a company for an

accounting period if condition A or B is met in the period.

(2)   

Condition A is that the rights and liabilities which fall to be treated as

comprised in the derivative contract are such that the extent to which shares

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may be acquired in accordance with them is to be determined using a cash

value—

(a)   

which is specified in the contract for the asset representing the creditor

relationship mentioned in section 645(2), or

(b)   

which is or will be ascertainable by reference to that contract.

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(3)   

Condition B is that the rights and liabilities which fall to be treated as

comprised in the derivative contract are such that—

(a)   

the company is entitled or obliged to receive a payment instead of the

shares which are the underlying subject matter of the derivative

contract, and

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(b)   

the amount of that payment differs by more than an insignificant

amount from the value of the shares which the company would be

entitled to acquire in accordance with those rights and liabilities at the

time it became entitled or obliged to receive the payment.

647     

Meaning of certain expressions in section 645

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(1)   

This section applies for the purposes of section 645.

(2)   

“Mandatorily convertible preference shares” means shares which—

 
 

Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 7 — Chargeable gains arising in relation to derivative contracts

312

 

(a)   

represent the creditor relationship mentioned in section 645(2),

(b)   

are not qualifying ordinary shares, and

(c)   

are issued upon terms which stipulate that they must be converted into,

or exchanged for, qualifying ordinary shares by a relevant time.

(3)   

In subsection (2) “relevant time” means a time no more than 24 hours after the

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acquisition of the shares by a person who, immediately before that acquisition,

had the creditor relationship.

(4)   

“Qualifying ordinary shares” means shares in a company which satisfy

conditions A and B.

(5)   

Condition A is that the shares are all or part of the issued share capital

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(however described) of the company, other than—

(a)   

capital the holders of which have a right to a dividend at a fixed rate but

have no other right to share in the profits of the company, or

(b)   

capital the holders of which have no right to a dividend of any

description nor any other right to share in the profits of the company.

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(6)   

Condition B is that the shares—

(a)   

are listed on a recognised stock exchange, or

(b)   

are shares in a holding company or a trading company.

(7)   

In subsection (6) “holding company” and “trading company” have the same

meaning as in section 165 of TCGA 1992 (see section 165A of that Act).

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648     

Creditor relationships: embedded derivatives which are exactly tracking

contracts for differences

(1)   

This section applies to a derivative contract of a company for an accounting

period if each of conditions A to F is met.

(2)   

Condition A is that the derivative contract is a relevant contract to which the

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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).

(4)   

Condition C is that the derivative contract is an exactly tracking contract.

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(5)   

Condition D is that the underlying subject matter of the derivative contract is

qualifying ordinary shares listed on a recognised stock exchange.

(6)   

Condition E is that the company is not a party to the creditor relationship at

any time in the accounting period for the purposes of a trade carried on by it.

(7)   

Condition F is that the company is not an excluded body.

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(8)   

Where this section applies to a derivative contract, the asset representing the

creditor relationship is treated for corporation tax purposes as not being a

qualifying corporate bond.

(9)   

See also section 672 (treatment of net gains and losses on disposal of certain

embedded derivatives).

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