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Clause 288: Priority between Chapters within this Part

1021.     This clause gives an order of priority between Chapters 3, 7 and 8 of this Part. It is based on sections 119 and 120 of ICTA. The corresponding rules for income tax are in section 262 of ITTOIA.

1022.     Subsection (3) deals with income that falls within both Chapter 7 and Chapter 8 of this Part. See Change 6 in Annex 1 and the commentary on clause 45.

Clause 289: Effect of company starting or ceasing to be within charge to corporation tax

1023.     This clause treats a company as starting or ceasing to carry on a property business in particular circumstances. It is based on section 337 of ICTA. The corresponding rule for income tax is in section 362 of ITTOIA.

1024.     This clause applies when a company moves into or out of the corporation tax regime. Non-UK resident companies are within the charge to corporation tax only if they are trading, are trading in the United Kingdom, and through a permanent establishment in the United Kingdom. Then they are chargeable to corporation tax on all the profits attributable to that permanent establishment. If those profits include the profits of a property business, first meeting or ceasing to meet those conditions will result in a change of taxing regime from income tax to corporation tax or vice versa.

Clause 290: Overseas property businesses and overseas land: adaptation of rules

1025.     This clause sets out how the rules for United Kingdom property businesses are to be adapted to apply to overseas property businesses. It is based on section 70A of ICTA. The corresponding rule for income tax is in section 363 of ITTOIA.

1026.     The clause explains how to apply the UK property business rules if foreign property law does not correspond exactly with United Kingdom property law.

Clause 291: Meaning of “lease” and “premises”

1027.     This clause is interpretative. It is based on section 24(1) of ICTA. The corresponding rule for income tax is in section 364 of ITTOIA.

Part 5: Loan Relationships

Overview

1028.     This overview deals with Parts 5 and 6.

1029.     This and the following Part contain provisions on loan relationships. The extent of the legislation merits two Parts.

1030.     A company has a loan relationship when it stands in the position of a creditor or debtor in respect of a money debt which is a transaction for the lending of money. The rules dealing with loan relationships are found in this Part. This Part is based mainly on Chapter 2 of Part 4 of FA 1996, which brings into account for corporation tax purposes all gains and losses arising to a company from its loan relationships.

1031.     Other arrangements which are treated as loan relationships such as debt which does not involve the lending of money, finance arrangements that do not involve the payment or receipt of interest, particular share issues, repurchase agreements etc are found in Part 6. The source legislation for this Part is sometimes found outside FA 1996.

1032.     Although the rules for computing the credits and debits on loan relationships used for the purposes of a trade are within this Part, the credits are treated as receipts and the debits as expenses in computing the trading profits within Part 3 of the Bill. Profits on loan relationships that are not used for the purposes of a trade are charged under this Part. The charge on such profits is separate from the charge on trading profits.

1033.     Losses on non-trading loan relationships (where debits exceed credits) are relieved against company profits.

1034.     Profits on derivative contracts which are not used for the purposes of a trade are charged as if they were gains on loan relationships, but the rules for computing such profits are to be found in the Part 7 (derivative contracts) of this Bill. Losses on such derivatives are also dealt with as if they were losses on a loan relationship.

1035.     Provisions on capital gains within the loan relationships provisions have not been rewritten in this Part or Part 6 but are inserted into TCGA by Schedule 1.

Chapter 1: Introduction

Overview

1036.     This Chapter acts as an introduction to this Part. It sets out the structure of the Part and the way in which credits and debits on a loan relationship are brought into account in the case of both trading and non-trading loan relationships.

Clause 292: Overview of Part

1037.     This clause provides an overview of the Part. It is new.

1038.     Subsection (1) refers only to “profits” on a loan relationship and not “profits and gains” as does the source legislation. This has been followed throughout the Part on the ground that only one term is necessary. “Profits” has been adopted as being the usual taxation term and as making the link to case law on profits for corporation tax purposes clearer for the two Parts.

1039.     The term “loan relationship” has been retained for its familiarity although the term is not as appropriate now as it was when the source legislation was enacted in 1996. The provisions now apply to a number of relationships which are not “loans”.

Clause 293: Construction of references to profits or losses from loan relationships

1040.     This clause provides that profits and losses from loan relationships include profits and losses from related transactions. It is based on section 84(1) of FA 1996. The inclusion of related transactions avoids the repetition of the source legislation (“gains and losses on loan relationships and related transactions, etc”).

Clause 294: Matters treated as loan relationships

1041.     This clause requires references to this Part of the Bill to include references to Part 6 and arises from the decision to spread the loan relationships provisions over two Parts of the Bill. It is new.

Clause 295: General rule: profits arising from loan relationships chargeable as income

1042.     This clause provides the basic rule that all profits on loan relationships are charged as income. It is based on section 80(1) of FA 1996.

Clause 296: Profits and deficits to be calculated using credits and debits given by this Part

1043.     This clause is based on section 82(1) of FA 1996.

Clause 297: Trading credits and debits to be brought into account under Part 3

1044.     This clause explains how debits and credits are to be treated where a loan relationship is used for the purposes of a trade. It is based on sections 80(2) and 82(2) and (7) of FA 1996.

Clause 298: Meaning of trade and purposes of trade

1045.     This clause explains what is meant by a company being a party to a creditor relationship for the purposes of a trade. It is based on section 103(2) and (3) of FA 1996.

Clause 299: Charge to tax on non-trading profits

1046.     This clause brings the company into charge to corporation tax on its non-trading profits. It is based on sections 9(1) to (3), 18(1) to (3) and 582(2) of ICTA and section 80(1) and (3) of FA 1996. See Change 59 in Annex 1 under clause 413 in respect of the Schedule D Case VI charge in section 582(2) of ICTA.

Clause 300: Method of bringing non-trading deficits into account

1047.     This clause explains how non-trading deficits on loan relationships are brought into account. It is based on section 80(4) of FA 1996.

Clause 301: Calculation of non-trading profits and deficits from loan relationships: non-trading credits and debits

1048.     This clause explains the use of the terms “non-trading credits” and “non-trading debits” in respect of loan relationships which are not used for the purposes of a trade and provides the rules for set-offs between the two. It is based on section 82(1) and (3) to (6) of FA 1996.

Chapter 2 Basic definitions

Overview

1049.     This Chapter provides definitions for this Part and Part 6.

Clause 302: “Loan relationship”, “creditor relationship”, “debtor relationship”

1050.     This clause defines three important terms used in the two Parts. It is based on sections 81(1) and 103(1) of FA 1996.

Clause 303: “Money debt”

1051.     This clause defines “money debt” for the purposes of the definition of a loan relationship in clause 302 and elsewhere. It is based on section 81(2) to (4) of FA 1996.

1052.     Section 81(6) which states that “money” includes money expressed in a currency other than sterling is unnecessary and has not been rewritten. “Money”, in its usual meaning, already includes currencies other than sterling.

Clause 304: “Related transaction”

1053.     This clause explains what is meant by a “related transaction”. It is based on section 84(5) and (6) of FA 1996.

Clause 305: Payments, interest, rights and liabilities under a loan relationship

1054.     This clause explains what is meant by these terms. It is based on section 81(5) of FA 1996.

Chapter 3: The credits and debits to be brought into account: general

Overview

1055.     This Chapter provides the rules for bringing profits and deficits on loan relationships into account for corporation tax purposes. The provisions in this Chapter all represent rules that apply generally rather than to specific types of securities or specific types of companies. They have therefore been placed early on in the Part.

Clause 306: Overview of Chapter

1056.     This clause provides an overview of the Chapter, explains the purpose of the clauses within the Part and signposts other relevant Chapters. It is new.

Clause 307: General principles about the bringing into account of credits and debits

1057.     This clause provides the rule that credits and debits are those recognised in determining the company’s profit and loss for a period and must fairly represent profits and losses from loan relationships and also gives further rules on allowable expenses. It is based on section 84(1) and (3) and 85A(1) of FA 1996.

1058.     Subsections (3)(c) and (4) allow certain expenses on loans to be treated as debits for the purposes of this Part.

1059.     The inclusion of profits of a capital nature in section 84(1)(a) of FA 1996 is rewritten in clause 293(3).

Clause 308: Amounts recognised in determining a company’s profit or loss

1060.     This clause explains what is meant by amounts recognised in determining a company’s profit or loss account for a period. It is based on section 85B(1) and (2) of FA 1996.

1061.     This clause updates the references in section 85B(1)(a) and (b) of FA 1996 to a company’s statement of income and gains, etc in line with current accountancy practice.

1062.     Accounting terms appearing more than once are included in clause 476 (other definitions). “Profit and loss account” (subsection (1)(a)) and “prior period adjustment” (subsection (2)) appear here only and take their ordinary accountancy meaning.

1063.     Subsection (1)(b) rewrites “statement of recognised gains and losses” as “statement of total recognised gains and losses” as being the usual accountancy term.

1064.     “Generally accepted accounting principles” appears in the Schedule 4 to this Bill.

1065.     Part 2(6) of Schedule 11 to F(No 2)A 2005 repeals section 85B(6) of FA 1996 with effect from a date to be appointed.

Clause 309: Companies without GAAP-compliant accounts

1066.     This clause gives the rule to be applied where accounts have not been prepared in accordance with generally accepted accounting practice. It is based on section 85A(2) to (4) of FA 1996 and paragraph 14(8) of Schedule 13 to FA 2007.

1067.     “Correct accounts” in section 85A(2) has been rewritten as “GAAP-compliant accounts” in subsection (1) as being a more neutral term.

Clause 310: Power to make regulations about recognised amounts

1068.     This clause gives powers to make regulations affecting clause 308. It is based on section 85B(3) to (6) of FA 1996 and paragraph 52 of Schedule 4 to FA 2005.

1069.     Part 2(6) of Schedule 11 to F(No 2)A 2005 repeals section 85(6) of FA 1996 with effect from a day to be appointed. Subsection (5), which rewrites section 85B(6) of FA 1996, will therefore cease to have effect from an appointed day (see Part 8 (loan relationships) of Schedule 2 to the Bill).

Clause 311: Amounts not fully recognised for accounting purposes: introduction

1070.     This clause sets out the circumstances in which clause 312 applies. It is based on section 85C(1) and (2) of FA 1996. This and the following clause apply where, as a result of GAAP (generally accepted accounting practice), the full amount arising on transactions is not brought into account. This can arise in two circumstances: first where assets and liabilities are “matched” and GAAP permits the whole or part of the income arising on those assets to be “derecognised” and second where there is a capital contribution and the company is not treated as a party to a debtor relationship or as having a recognised accounting liability.

Clause 312: Determination of credits and debits where amounts not fully recognised

1071.     This clause gives the rule to be applied where the circumstances in the preceding clause are in point and requires credits and debits arising on transactions which are not recognised in determining the company’s profit or loss to be recognised. It is based on section 85C(3) to (8) of FA 1996.

Clause 313: Basis of accounting: “amortised cost basis”, “fair value accounting” and “fair value”

1072.     This clause deals with the accounting bases that may apply to loan relationships. It is based on section 85A(1) and section 103(1) of FA 1996.

1073.     In general a company may make use of either an amortised cost basis or fair value in accounting for loan relationships (both these terms are defined in the clause) but certain provisions specify that an amortised cost basis or fair value basis must be used. These are listed in subsection (2).

Clause 314: Power to make regulations about changes from amortised cost basis

1074.     This clause provides the powers for the Treasury to make regulations providing for the continued use of an amortised costs basis. It is based on section 90A(1) and (2) of FA 1996.

Clause 315: Introduction to sections 316 to 319

1075.     This clause acts as an introduction to the following four clauses which provide the rules to apply where there is a change in accounting policy from one period of account to the next. It is based on paragraph 19A(1) and (2) of Schedule 9 to FA 1996.

1076.     Although this provision was enacted specifically to deal with companies changing from UK GAAP to international accounting standards or vice versa it will apply equally to other changes where both policies accord with the law and practice.

Clause 316: Change of accounting policy involving change of value

1077.     This clause requires debits or credits to be brought into account representing the difference between the value of the asset or liability at the end of the last period of account under the old accounting policy and the beginning of the first period under the new accounting policy. It is based on paragraph 19A(3) and (5) of Schedule 9 to FA 1996.

Clause 317: Carrying value

1078.     This clause gives the meaning of terms used in the previous clause. It is based on paragraph 19A(4), (4A) and (4B) of Schedule 9 to FA 1996.

Clause 318: Change of accounting policy following cessation of loan relationship

1079.     This clause provides for debits and credits representing differences in the value of assets and liabilities following a change of accounting policy to be brought into account where clause 331 (company ceasing to be party to a loan relationship) also applies. It is based on paragraph 19A(4C) to (5) of Schedule 9 to FA 1996.

1080.     Sub-paragraph (4C) of paragraph 19A provides for the difference between the two values to be brought into account at the beginning of the later period. This is not rewritten as it is unnecessary. This brings the clause into line with paragraph 50A(3C) of Schedule 26 to FA 2002, the equivalent provision for derivative contracts.

Clause 319: General power to make regulations about changes in accounting policy

1081.     This clause gives the Treasury powers to make regulations providing for debits and credits to be brought into account or not to be brought into account under this Part where a change of accounting policy affects the amounts brought into account for accounting purposes. The clause is based on paragraph 19B of Schedule 9 to FA 1996 and paragraph 52 of Schedule 4 to FA 2005.

Clause 320: Credits and debits treated as relating to capital expenditure

1082.     This is the first of several clauses which require debits and credits to be brought into, or not brought into, account for the purposes of this Part where normal accounting treatment is not followed. It is based on paragraph 14 of Schedule 9 to FA 1996. This clause provides that a credit or debit which has been capitalised but which is in respect of a loan relationship is, in certain circumstances, to be brought into account.

1083.     The words “for the purposes of corporation tax” in paragraph 14(2) have been rewritten in subsection (2) more narrowly as “for the purposes of this Part”, the wider purpose being unnecessary in this context.

1084.     In subsection (6) “the interest component of the asset” is the interest element capitalised with the relevant asset.

Clause 321: Credits and debits recognised in equity

1085.     This clause provides that credits and debits on loan relationships taken directly to reserves should be brought into account as if they were taken to the profit and loss account. It is based on paragraph 14A of Schedule 9 to FA 1996.

Clause 322: Release of debts: cases where credits not required to be brought into account

1086.     This clause provides that credits are not brought into account by a debtor company on the release of the debt when an amortised cost basis is used and certain conditions are met. It is based on paragraph 5(3), (4), (7) and (8) of Schedule 9 to FA 1996.

1087.     Conditions 2 and 3 of paragraph 5 of Schedule 9 to FA 1996 apply only where the debtor and creditor companies are connected and are rewritten in clauses 358 and 359 in Chapter 6 of this Part (connected companies relationships: impairment losses and releases of debts).

1088.     Subsection (6) lists the insolvency conditions from paragraph 6A(1) of Schedule 9 to FA 1996 rather than cross-referring as does paragraph 5(7).

Clause 323: Meaning of expressions relating to insolvency etc

1089.     This clause gives the meaning of various terms relevant to the preceding clause. It is based on paragraphs 5(7) and 6A(3) to (5) of Schedule 9 to FA 1996.

1090.     References to Northern Ireland legislation in this clause have been updated to take into account amendments made by the Insolvency (Northern Ireland) Order 2005 (SI 2005/1455 (NI10)).

Clause 324: Restriction on debits resulting from revaluation

1091.     This clause precludes debits from being brought into account on revaluation of assets representing creditor relationships for the purposes of this Part (other than impairment losses or debt releases on the revaluation of asset) unless under fair value accounting. It is based on paragraph 6D(1) and (3) to (5) of Schedule 9 to FA 1996.

Clause 325: Restriction on credits resulting from reversal of disallowed debits

1092.     This clause provides that the reversal of debits disallowed under the previous clause are not brought into account under this Part. It is based on paragraph 6D(2) and (5) of Schedule 9 to FA 1996.

Clause 326: Writing off government investments

1093.     This clause provides that no credit need be brought into account where the government releases a liability on a government debt. It is based on paragraph 7 of Schedule 9 to FA 1996.

Clause 327: Disallowance of imported losses etc

1094.     This clause ensures that no part of a loss on a loan relationship is brought into account if it arose at a time when the loan relationship was not subject to United Kingdom taxation. It is based on paragraph 10 of FA 1996.

Clause 328: Exchange gains and losses

1095.     This clause includes exchange gains and losses within credits and debits on loan relationships. It is based on section 84A(1) to (3A) and (8) to (10) of FA 1996.

1096.     This clause updates the references in section 84A(3)(b) of FA 1996 in line with current accountancy practice.

1097.     Subsection (3)(b) rewrites “statement of recognised gains and losses” as “statement of total recognised gains and losses” as being the usual accountancy term.

1098.     Section 84A(8) of FA 1996 as it applies to chargeable gains (section 84A(9)(b)) is rewritten as an insertion into TCGA. See Schedule 1 to this Bill.

1099.     Part 2(6) of Schedule 11 to F(No 2)A 2005 repeals section 84A of FA 1996 with effect from a day to be appointed. This clause, which rewrites that section, therefore ceases to have effect from an appointed day (see Schedule 2 to this Bill).

Clause 329: Pre-loan relationship and abortive expenses

1100.     This clause allows abortive expenditure in connection with a loan relationship. It is based on section 84(4) of FA 1996.

Clause 330: Debits in respect of pre-trading expenditure

1101.     This clause provides for an election to be made for non-trading debits incurred before the commencement of a trade to be treated as trading debits after that trade has commenced. It is based on section 401(1AB) and (1AC) of ICTA.

Clause 331: Company ceasing to be party to loan relationship

1102.     This clause provides for debits and credits to be taken into account in respect of a loan relationship to which a company is no longer a party if those debits and credits have not already been fully taken into account. It is based on section 103(6) to (8) of FA 1996.

 
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