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Corporation Tax Bill


Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 8 — Further provision about chargeable gains and derivative contracts

318

 

Interpretation

659     

Meaning of “relevant credits” and “relevant debits”

(1)   

This section applies for the purposes of this Chapter.

(2)   

In the case of a derivative contract which is not one to which section 650

(property based total return swaps) applies for an accounting period, the

5

relevant credits and debits are the credits and debits which are given in relation

to the derivative contract for the accounting period by section 595.

(3)   

In the case of a derivative contract to which section 650 applies for an

accounting period, the relevant credits and debits are the credits and debits

which—

10

(a)   

are given in relation to the derivative contract for the accounting period

by section 595, and

(b)   

are within subsection (4).

(4)   

The credits and debits are those found for the period by applying R% to N,

where—

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N is the amount which is the notional principal amount in the case of the

derivative contract, and

R% is the percentage change (if any) in the capital value index over the

relevant period.

(5)   

In subsection (4) “the relevant period” means—

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(a)   

the accounting period, if the company is a party to the derivative

contract throughout that period,

(b)   

in any other case, any part of the accounting period throughout which

the company is a party to the derivative contract.

(6)   

For the meaning of “the capital value index”, see section 650(4).

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Chapter 8

Further provision about chargeable gains and derivative contracts

Company ceasing to be party to certain contracts

660     

Contract relating to holding in OEIC, unit trust or offshore fund

(1)   

This section applies if—

30

(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

fund) applies in relation to the relevant contract for the second of those

periods but not the first, and

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(c)   

immediately before the beginning of the second period the relevant

contract was a chargeable asset.

(2)   

The company must bring into account for the accounting period in which it

ceases to be a party to the contract the amount of any chargeable gain or

allowable loss which would have been treated as accruing to it on the

40

assumptions in subsection (3).

 
 

Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 8 — Further provision about chargeable gains and derivative contracts

319

 

(3)   

Those assumptions are that—

(a)   

the company disposed of the relevant contract immediately before the

beginning of the second period mentioned in subsection (1), and

(b)   

the disposal was for consideration of an amount equal to the value (if

any) given to the relevant contract in the accounts of the company at the

5

end of the first such period.

661     

Contract which becomes derivative contract

(1)   

This section applies if—

(a)   

a company is a party to a relevant contract which (not having been a

derivative contract) becomes a derivative contract, and

10

(b)   

immediately before the relevant contract becomes a derivative contract

it is a chargeable asset.

(2)   

The company must bring into account for the accounting period in which it

ceases to be a party to the relevant contract the amount of any chargeable gain

or allowable loss which would have been treated as accruing to it on the

15

assumptions in subsection (3).

(3)   

Those assumptions are that—

(a)   

the company disposed of the relevant contract immediately before the

relevant time, and

(b)   

the disposal was for consideration of an amount equal to the notional

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carrying value of the relevant contract at that time.

(4)   

In this section “the relevant time” means the time when the relevant contract

becomes a derivative contract.

(5)   

Section 622(4) (meaning of “notional carrying value”) applies for the purposes

of this section.

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Contracts ceasing to be derivative contracts

662     

Contracts ceasing to be derivative contracts

(1)   

This section applies if a company is a party to a relevant contract which ceases

to be a derivative contract.

(2)   

The company is treated for the purposes of corporation tax on chargeable gains

30

as if it had acquired the contract immediately after 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

be a derivative contract.

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(4)   

Section 622(4) (meaning of “notional carrying value”) applies for the purposes

of this section.

Carry back of net losses on certain derivative contracts

663     

Contracts to which section 641 applies

(1)   

This section applies in the case of a company if—

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Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 8 — Further provision about chargeable gains and derivative contracts

320

 

(a)   

there are net section 641 losses for an accounting period (“the loss

period”),

(b)   

there are net section 641 gains for a previous accounting period (“the

gains period”),

(c)   

the gains period falls wholly or partly within the period of 24 months

5

immediately preceding the start of the loss period, and

(d)   

within two years after the end of the loss period the company makes a

claim in respect of the whole or a part of the net section 641 losses for

the loss period.

(2)   

The net section 641 gains for the gains period are reduced (but not below nil)

10

by the amount in respect of which the claim is made.

(3)   

And the net section 641 losses for the loss period are reduced by the amount in

respect of which the claim is made.

(4)   

For the purposes of this section—

(a)   

the net section 641 gains for a later period are reduced so far as possible

15

before the net section 641 gains for an earlier period, and

(b)   

where a gains period falls partly before the start of the 24 month period

mentioned in subsection (1), only the appropriate fraction of the net

section 641 gains for that period may be reduced.

(5)   

For the meaning of “net section 641 gains”, “net section 641 losses” and “the

20

appropriate fraction”, see section 664.

664     

Meaning of certain expressions in section 663

(1)   

This section applies for the purposes of section 663.

(2)   

If for an accounting period L exceeds G, there are net section 641 losses for the

period of an amount equal to the excess.

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(3)   

If for an accounting period G exceeds the sum of L and N, there are net section

641 gains for the period of an amount equal to the excess.

(4)   

In this section—

G is the sum of the amounts of any chargeable gains treated as accruing to

the company in the period under section 641(3)(a) in respect of

30

derivative contracts of the company (“section 641 gains”),

L is the sum of the amounts of any allowable losses treated as accruing to

the company in the period under section 641(3)(b) in respect of

derivative contracts of the company (“section 641 losses“), and

N is the sum of the amounts of any non-section 641 losses which would

35

fall to be deducted in the period from section 641 gains, on the

assumption in subsection (5).

(5)   

That assumption is that, as respects the accounting period, non-section 641

losses are treated as being deducted from non-section 641 gains, so far as

possible, before any remainder is deducted from section 641 gains.

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Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 8 — Further provision about chargeable gains and derivative contracts

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(6)   

The “appropriate fraction” is—equation: over[char[A],char[B]]

   

where—

A is the number of days in the gains period which fall within the 24 month

period mentioned in section 663(1)(c), and

B is the number of days in the gains period.

5

(7)   

In this section—

“deducted” means deducted in accordance with section 8(1) of TCGA

1992 (company’s total profits to include chargeable gains),

“the gains period” has the same meaning as in section 663,

“non-section 641 gains” means any chargeable gains accruing to the

10

company in the accounting period, other than section 641 gains, and

“non-section 641 losses” means any allowable losses of the company

which may be deducted in the accounting period, other than section

641 losses.

Issuers of securities with embedded derivatives: equity instruments

15

665     

Introduction to section 666

(1)   

Section 666 (allowable loss treated as accruing) applies to a company for an

accounting period if each of conditions A to F is met.

(2)   

Condition A is that the company is treated as a party to a relevant contract

under section 585(2) (loan relationships with embedded derivatives) because

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of a debtor relationship of the company.

(3)   

Condition B is that the division mentioned in section 585(1) (loan relationships

with embedded derivatives) in the case of the debtor relationship is between—

(a)   

rights and liabilities under a loan relationship, and

(b)   

rights and liabilities under an equity instrument of the company.

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(4)   

Condition C is that the relevant contract is treated as an option by section

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

(5)   

Condition D is that the company pays an amount in the accounting period to

the person who is a party to the debtor relationship as creditor in discharge of

any obligations under that relationship.

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(6)   

Condition E is that at the time when the company became a party to the debtor

relationship—

(a)   

it was not carrying on a banking business or a business as a securities

house, or

(b)   

if it was carrying on such a business, it did not become a party to that

35

relationship in the ordinary course of that business.

(7)   

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

 
 

Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 8 — Further provision about chargeable gains and derivative contracts

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(8)   

In this section “option” is to be construed as if section 580(2) and (3) (meaning

of “option”) were omitted.

666     

Allowable loss treated as accruing

(1)   

If A exceeds B, an allowable loss equal to the amount of the excess is treated as

accruing to the company in the accounting period for the purposes of

5

corporation tax on chargeable gains.

(2)   

In this section—

A is the amount paid as mentioned in section 665(5) reduced (but not

below nil) by an amount equal to the fair value of the host contract at

the time that amount is paid,

10

B is the amount treated as the carrying value of the relevant contract

mentioned in section 665(4) at the time the company became a party to

the debtor relationship mentioned in section 665(2), and

“the host contract” means the loan relationship to which the company is

treated as a party under section 415(2) (loan relationships with

15

embedded derivatives) because of the debtor relationship.

Treatment of shares acquired in certain circumstances

667     

Shares acquired on exercise of non-embedded option

(1)   

This section applies if—

(a)   

a company is a party to a derivative contract in an accounting period,

20

(b)   

the derivative contract is a plain vanilla contract,

(c)   

the contract is an option,

(d)   

rights to acquire shares are comprised in the contract, and

(e)   

shares are acquired as a result of the exercise of any of those rights in

the accounting period.

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(2)   

For the purpose of calculating any chargeable gain accruing to the company on

a disposal by it of all the shares so acquired, the sums allowable as a deduction

under section 38(1)(a) of TCGA 1992 (acquisition costs) are—

(a)   

if G exceeds L, increased by the amount of that excess,

(b)   

if L exceeds G, reduced by the amount of that excess,

30

   

and, in the case of a part disposal of those shares, section 42(2) of that Act (part

disposals) has effect accordingly.

(3)   

If the amount of the excess in subsection (2)(b) is greater than the amount of

expenditure allowable under section 38(1)(a) of TCGA 1992, the amount of the

excess which cannot be deducted from the expenditure so allowable is, for the

35

purpose mentioned in subsection (2), added to the amount of the consideration

for the disposal of the shares.

(4)   

For the meaning of G and L, see section 669.

668     

Shares acquired on running of future to delivery

(1)   

This section applies if—

40

(a)   

a company is a party to a derivative contract in an accounting period,

(b)   

the derivative contract is a plain vanilla contract,

 
 

Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 8 — Further provision about chargeable gains and derivative contracts

323

 

(c)   

the contract is a future, and

(d)   

delivery is taken of shares in accordance with the terms of the future.

(2)   

For the purpose of calculating any chargeable gain accruing to the company on

a disposal by it of all the shares so delivered, the sums allowable as a deduction

under section 38(1)(a) of TCGA 1992 (acquisition costs) are—

5

(a)   

if G exceeds L, increased by the amount of that excess,

(b)   

if L exceeds G, reduced by the amount of that excess,

   

and, in the case of a part disposal of those shares, section 42(2) of that Act (part

disposals) has effect accordingly.

(3)   

If the amount of the excess in subsection (2)(b) is greater than the amount of

10

expenditure allowable under section 38(1)(a) of TCGA 1992, the amount of the

excess which cannot be deducted from the expenditure so allowable is, for the

purpose mentioned in subsection (2), added to the amount of the consideration

for the disposal of the shares.

(4)   

For the meaning of G and L, see section 669.

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669     

Meaning of G and L in sections 667 and 668

(1)   

This section applies for the purposes of sections 667 and 668.

(2)   

G is the sum of the credits brought into account under section 574 (non-trading

credits and debits to be brought into account under Part 5) in respect of the

derivative contract in each relevant accounting period so far as referable, on a

20

just and reasonable apportionment, to the shares acquired as a result of the

exercise of rights mentioned in section 667(1)(e) or the delivery mentioned in

section 668(1)(d).

(3)   

L is the sum of the debits brought into account under section 574 in respect of

the derivative contract in each relevant accounting period, so far as so

25

referable.

(4)   

In this section “relevant accounting period” means—

(a)   

the accounting period in which the disposal in question is made, or

(b)   

any previous accounting period.

Treatment of net gains and losses on exercise of option

30

670     

Treatment of net gains and losses on exercise of option

(1)   

This section applies if—

(a)   

a derivative contract is one to which section 645 (creditor relationships:

embedded derivatives which are options) applies for an accounting

period,

35

(b)   

rights to acquire shares fall to be treated as comprised in the derivative

contract because of section 585(2), and

(c)   

any of those rights are exercised or otherwise disposed of in the

accounting period.

(2)   

Subsection (3) applies if there is a disposal of the asset representing the creditor

40

relationship mentioned in section 645(2).

 
 

Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 8 — Further provision about chargeable gains and derivative contracts

324

 

(3)   

For the purpose of calculating any chargeable gain accruing to the company on

the disposal, the sums allowable as a deduction under section 38(1)(a) of TCGA

1992 (acquisition costs) are—

(a)   

if the sum of G and CV exceeds L, increased by the amount of that

excess,

5

(b)   

if L exceeds the sum of G and CV, reduced by the amount of that excess.

(4)   

Subsection (5) applies if there is a disposal of all or any of the shares (“the

relevant shares”) acquired—

(a)   

as a result of the exercise of rights mentioned in subsection (1)(c), and

(b)   

in circumstances where a disposal is deemed not to occur because of

10

section 127 of TCGA 1992 (equation of original shares and new

holding).

(5)   

For the purpose of calculating any chargeable gain accruing to the company on

a disposal of all the relevant shares, the sums allowable as a deduction under

section 38(1)(a) of TCGA 1992 (acquisition costs) are—

15

(a)   

if the sum of G and CV exceeds L, increased by the amount of that

excess,

(b)   

if L exceeds the sum of G and CV, reduced by the amount of that excess,

   

and, in the case of a part disposal of those shares, section 42(2) of that Act (part

disposals) has effect accordingly.

20

(6)   

If the amount of the excess in subsection (3)(b) or (5)(b) is greater than the

amount of expenditure allowable under section 38(1)(a) of TCGA 1992, the

amount of the excess which cannot be deducted from the expenditure so

allowable is, for the purpose mentioned in subsection (3) or (5) (as the case may

be), added to the amount of the consideration for the disposal so mentioned.

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(7)   

Sections 37 and 39 of TCGA 1992 (consideration chargeable to tax on income

and exclusion of expenditure by reference to tax on income) do not apply in

relation to a disposal mentioned in subsection (2) or (4) above.

(8)   

For the meaning of G, L and CV, see section 671.

671     

Meaning of G, L and CV in section 670

30

(1)   

This section applies for the purposes of section 670.

(2)   

G is the sum of the amounts of any chargeable gains treated as accruing to the

company under section 641(3)(a) (derivative contracts to be taxed on a

chargeable gains basis) in respect of the derivative contract in each relevant

accounting period, so far as referable, on a just and reasonable apportionment,

35

to the shares acquired as a result of the exercise of rights mentioned in section

670(1)(c).

(3)   

L is the sum of the amounts of any allowable losses treated as accruing to the

company under section 641(3)(b) in respect of the derivative contract in each

relevant accounting period, so far as so referable.

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(4)   

CV is the amount by which the carrying value of the host contract at the date

on which the option is exercised exceeds the carrying value of that contract at—

(a)   

the date on which the company became a party to the creditor

relationship mentioned in section 645(2), or

(b)   

(if later) the date on which the derivative contract became one to which

45

section 645 applies.

 
 

 
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