Corporation Tax Bill - continued          House of Commons

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Clause 332: Repo, stock lending and other transactions

1103.     This clause provides that where a company ceases to be party to a loan relationship in any period (whether as a result of a repo or otherwise) but continues in accordance with GAAP to recognise amounts in its accounts in respect of that relationship the company must bring those amounts into account. It is based on paragraph 15 of Schedule 9 to FA 1996.

Clause 333: Company ceasing to be UK resident

1104.     This clause provides that a company ceasing to be resident in the United Kingdom is treated as disposing of assets and liabilities which represent loan relationships at fair value unless they are held or owed by a permanent establishment in the United Kingdom. It is based on paragraph 10A(1) to (3) of Schedule 9 to FA 1996.

Clause 334: Non-UK resident company ceasing to hold loan relationship for UK permanent establishment

1105.      This clause provides for a deemed disposal for fair value where an asset or liability representing a loan relationship of a non-UK resident company ceases to be held or owed by a permanent establishment in the United Kingdom other than as a result of a disposal etc. It is based on paragraph 10A(1), (1A) and (4) of Schedule 9 to FA 1996.

Chapter 4: Continuity of treatment on transfers within groups or on reorganisations

Overview

1106.     This Chapter sets out what happens when a loan relationship is transferred between members of a group and on a reorganisation.

Clause 335: Introduction to Chapter

1107.     This clause acts as an introduction by setting out the three cases under which the continuity of treatment provisions in the Chapter apply and explaining how the Chapter is organised. It is based on paragraphs 12(1) and (8) and 12G(1) and (4) of Schedule 9 to FA 1996.

Clause 336: Transfers of loans on group transactions

1108.     This clause specifies the transfers within the first case in clause 335(1) where the continuity rules of the Chapter apply - transfers between group members. It is based on paragraph 12(1) and (3) of Schedule 9 to FA 1996.

Clause 337: Transfers of loans on insurance business transfers

80     This clause specifies the transfer within the second case in clause 335(1) where the continuity rules of the Chapter apply. It is based on paragraph 12(1), (4) and (5) of Schedule 9 to FA 1996.

81     In subsection (6)(b) “corresponding category” means the category of asset in section 440(4) of ICTA as modified by regulation 11(3) of The Overseas Life Insurance Companies Regulations 2006 (SI 2006/3271).

Clause 338: Meaning of company replacing another as party to loan relationship

1109.     This clause explains what is meant by one party replacing the other as a party to a loan relationship for the purposes of clause 335. It is based on paragraph 12(6) to (7A) of Schedule 9 to FA 1996.

1110.     Subsections (3) and (4) deal with the position where a company replaces another company as a creditor and subsections (5) and (6) where it replaces the other company as a debtor. The debtor rules will apply where a company has borrowed money but substitutes another group company as the debtor by novating the debt.

Clause 339: Issues of new securities on certain cross-border reorganisations

1111.     This clause sets out the third case in clause 335(1) where the continuity rules of the Chapter apply. This case is where section 135(3) of TCGA (exchange of securities for those in another company) applies (or would do but for section 116(5) of that Act) and certain conditions are met. It is based on paragraphs 12G(1), (3) and (6) and 12J(2) of Schedule 9 to FA 1996.

Clause 340: Group transfers and transfers of insurance business: transfer at notional carrying value

1112.     Under this clause any gain or loss is disregarded where, as a result of a transaction or series of transactions referred to in clause 335(1)(a) and (b) 335, one company replaces another as a party to a loan relationship. It is based on paragraph 12(1), (2ZA), (2), (2C) and (9) of Schedule 9 to FA 1996. The clause provides that the transaction or series of transactions take place at book value (“carrying value”).

1113.     The rules in this clause regarding the bringing into account of debits and credits apply only where the company being replaced as party to the loan relationship accounts for the relationship under the amortised cost basis. Clause 341 provides rules for where the company being replaced as a party to the loan relationship uses fair value accounting.

Clause 341: Transferor using fair value accounting

1114.     This clause applies where the company making the transfer under clause 340 uses fair value accounting as respects the loan relationship or the debits and credits to be brought into account rather than the amortised cost basis. It is based on 12(2A) to (2C) of Schedule 9 to FA 1996.

1115.     The company which is being replaced as a party to the loan relationship brings in the asset or liability at fair value. The company becoming a party to the loan relationship is treated as acquiring the asset or liability for the same value it has in the accounts of the company being replaced.

Clause 342: Issues of new securities on reorganisations: disposal at notional carrying value

1116.     This clause provides that where clause 339 applies (the third case in clause 335(1)), debits and credits are to be brought into account as if there were a disposal of the loan relationship at its carrying value in the accounts. It is based on clause 12G(1) and (3) to (5) of Schedule 9 to FA 1996.

Clause 343: Receiving company using fair value accounting

1117.     This clause provides the rule to apply in place of the rule in clause 342 where fair value accounting is used by the company to which the issue of shares or debentures is made. It is based on paragraph 12G(5) of Schedule 9 to FA 1996 (which applies paragraph 12(2A) of that Schedule).

Clause 344: Introduction

1118.     This clause introduces the two following clauses and provides that they apply where a company leaves a group within six years and an asset or liability was transferred to that company in circumstances where clause 340 applies. It is based on paragraph 12A(1), (5), (5A) and (8) of Schedule 9 to FA 1996.

Clause 345: Transferee leaving group otherwise than because of exempt distribution

1119.     This clause provides the first of the degrouping rules: where a company ceases to be a member of a group otherwise than as a result of an exempt distribution under section 213(2) of ICTA. It is based on paragraph 12A(1) to (5) and (9) of Schedule 9 to FA 1996. Because section 213 of ICTA is designed to facilitate demergers, there is no degrouping charge where that section applies to exempt a distribution of the company’s shares. This clause deems there to have been a disposal and reacquisition at market value just before the company leaves the group and any resulting credit must be brought into account.

1120.     Subsection (4) is designed to ensure parity of treatment between a loan relationship and a derivative contract that is being used to hedge it. The effect is to allow a debit on the loan relationship on deemed disposal if a credit is brought into account on the derivative contract.

Clause 346: Transferee leaving group because of exempt distribution

1121.     This clause applies to bring in a charge, in certain circumstances, where one group member replaces another group member as a party to a loan relationship and ceases to be a group member as a result of an exempt distribution under section 213(2) of ICTA. It is based on paragraph 12A(3) to (9) of Schedule 9 to FA 1996.

1122.     Where a company exploits a demerger for avoidance purposes by transferring within a five year period funds or assets to its members, a chargeable payment arises under section 214(2) of ICTA. Where such chargeable payments are made this clause treats the company as disposing of, and immediately reacquiring, the loan relationship at fair value when the chargeable payment is made.

Clause 347: Disapplication of Chapter where transferor party to avoidance

1123.     This clause applies where an asset or liability is likely to be transferred by the transferee company and the continuity provisions applying for clauses 336 and 337 would otherwise apply. It is based on paragraph 12(2D) to (2F) of Schedule 9 to FA 1996. Where the transfer is under arrangements to which the transferor company is a party and the intention is to avoid tax, the continuity provisions of this Chapter which would otherwise apply do not.

Chapter 5: Connected companies relationships: introduction and general

Overview

1124.     Connected companies loan relationships are subject to special rules under this Part. The Chapter explains what is meant by such a relationship, the accounting rules to apply to that relationship and what happens when a company begins or ceases to be a connected company.

Clause 348: Introduction: meaning of “connected companies relationship”

1125.     This clause provides the meaning of “connected companies relationship”. It is based on section 87(1), (3) and (5) of FA 1996.

1126.     “Person” in section 87(1), (3) and (5) of FA 1996 has been rewritten as “company”. See Change 56 in Annex 1.

1127.     Section 87(5) deals with intermediaries between two connected companies through which a loan is “dog-legged”. Such intermediaries may be individuals. This has been rewritten in this clause by treating debtor and creditor relationships separately. Paragraph (b) of subsections (2) and (4) is necessary because loans between individuals do not fall into the definition of a loan relationship in section 81(1) of FA 1996.

1128.     Subsection (6) brings out more clearly than in the source legislation (section 87(3) of FA 1996) that where there is a connection at any time in an accounting period there is a connected companies relationship for the whole of the period.

Clause 349: Application of amortised cost basis to connected companies relationships

1129.     This clause provides that where a loan relationship is a “connected companies relationship” (the parties to a loan relationship are connected) both parties must use the same basis of accounting - the amortised cost basis rather than the fair value basis. It is based on section 87(1) and (2) of FA 1996. The same basis of accounting ensures both that the value of the loan cannot be artificially depressed and that debits in the one company are matched by credits in the other.

1130.     In subsection (2) “for the period” has been added for clarification. The words do not appear in section 87(2) which this subsection rewrites.

1131.     Subsection (3) makes the requirement for amortised cost basis subject to clause 454 (reset bonds) which requires fair value accounting to apply. See Change 57 in Annex 1.

Clause 350: Companies beginning to be connected

1132.     This clause provides the rule to be applied when companies begin to be connected under clause 348 and this involves a change in accounting basis from fair value accounting to the amortised cost basis. It is based on section 87(2A) and (2B) of FA 1996.

Clause 351: Companies ceasing to be connected

1133.     This clause provides the rule to be applied when companies cease to be connected under clause 348 and this involves a change in accounting basis from the amortised cost basis to fair value accounting. It is based on section 87(2A) and (2C) of FA 1996.

Clause 352: Disregard of related transactions

1134.     This clause provides that credits and debits in respect of related transactions are only brought into account where they do not create greater deductions or smaller credits than would have been the case if the transactions had not taken place. The clause is based on paragraph 6(1), (2) and (6) to (8) of Schedule 9 to FA 1996.

Chapter 6: Connected companies relationships: impairment losses and releases of debts

Overview

1135.     This Chapter provides rules for impairment losses and release of debt where there is a connection between the debtor and creditor companies.

1136.     Paragraph 5ZA of Schedule 9 to FA 1996 requires paragraphs 6, 6A and 6C of that Schedule to apply in relation to a debit in respect of the release of a liability as they apply in relation to an impairment loss. In rewriting these paragraphs references to a debt on the release of a liability (referred to here as a “release debit”) have been inserted into the relevant clauses.

Clause 353: Introduction to Chapter

1137.      This clause explains the subject and layout of the Chapter and provides some definitions. It is based on section 87(3) of, and paragraphs 4A(8), 5ZA and 6C(1) of Schedule 9 to, FA 1996.

Clause 354: Exclusion of debits for impaired or released connected companies debts

1138.     This clause provides the basic rule that neither impairment losses nor debits arising as a result of the release of liability under a creditor relationship (“release debits”) are brought into account if the debtor and creditor company are connected. It is based on paragraph 6(1) to (3) and (8) of Schedule 9 to FA 1996.

Clause 355: Cessation of connection

1139.     This clause provides that debits for impairment losses or release debits which are not brought into account under the preceding clause are not to be brought into account in subsequent accounting periods after connection ceases. It is based on paragraph 6C(1) and (3) of Schedule 9 to FA 1996.

1140.     Paragraph 6C(3) of Schedule 9 refers to a “debit .. in respect of an amount” although there is now no preceding reference in the paragraph to an amount. This reference was not repealed following an amendment by FA 2002. Sub-paragraph (1) previously read:

    (1) Where, in the case of a creditor relationship of a company,-

    (a) a departure that would otherwise have been allowed under paragraph 5(1) above in respect of an amount is or was, by virtue of paragraph 6 above, not allowed in the case of an accounting period; and

    (b) there is a subsequent accounting period for which there is, within the meaning of section 87 of this Act, no connection between the company and any person standing in the position of a debtor as respects the debt,

    sub-paragraphs (2) and (3) below shall apply.

1141.     The paragraph has been rewritten to reflect the fact that “the amount” refers to the impairment loss (or release debit by virtue of paragraph 5ZA of Schedule 9).

Clause 356: Exception to section 354: swapping debt for equity

1142.     This clause provides the first of two exceptions to the basic rule in clause 354. It is based on paragraph 6(4) and (5) of Schedule 9 to FA 1996. The exception in this clause applies when the liability is released in consideration for shares in the debtor company which give rise to the connection.

Clause 357: Exception to section 354: insolvent creditors

1143.     This clause provides the second exception to the basic rule in clause 354. It is based on paragraph 6A(1) and (2) of Schedule 9 to FA 1996. The exception in this clause applies where the creditor is in insolvent liquidation, etc and the impairment loss or release debit accrues during the winding up, etc.

Clause 358: Exclusion of credits on release of connected companies debts: general

1144.     This clause precludes a debtor company from bringing a credit into account under this Part on the release of a debt where the debtor and creditor companies are connected. It is based on paragraph 5(3) and (5) of Schedule 9 to FA 1996. This clause excludes the credits on the release since the debits have been disallowed (see clause 354).

1145.     Subsection (1)(b) brings out the fact that the clause applies in respect of the accounting period in which the release occurs.

Clause 359: Exclusion of credits on release of connected companies debts during creditor’s insolvency

1146.     This clause precludes a debtor company from bringing a credit into account on the release of a debt where the creditor company meets the insolvency, etc conditions in clause 357 if the insolvency, etc breaks the connected company relationship. It is based on paragraph 5(3) and (6) of Schedule 9 to FA 1996.

1147.     Subsection (1)(d) and (e) reflect the rule in section 12(7) and (7ZA) of ICTA that an accounting period ends with insolvency or administration.

Clause 360: Exclusion of credits on reversal of impairments of connected companies debts

1148.     This clause provides that the credit on a reversed impairment loss is not brought into account under this Part where that loss is not brought into account under clause 354. It is based on paragraph 6(3A) and (8) of Schedule 9 to FA 1996.

Clause 361: Acquisition of creditor rights by connected company at undervalue

1149.     This clause applies where a company acquires a debt from a third party as a result of which it becomes connected to the debtor. The clause is based on paragraph 4A of Schedule 9 to FA 1996. If the pre-acquisition value of the debt exceeds the consideration, the difference is treated as a release by the acquiring company and hence a charge on the debtor company.

1150.     Under paragraph 4A(2)(d) the provisions of that paragraph do not apply where the new creditor acquires the debt from a connected person. “Person” has been rewritten in subsection (1)(d) to apply to a company only. See Change 56 in Annex 1.

Clause 362: Parties becoming connected where creditor’s rights subject to impairment adjustment

1151.     Under this clause where a debtor company and a creditor company become connected, any reduction in the value of the debt as a result of an impairment loss which was not yet reflected in the book value of the debt at the time of acquisition is treated as a release by the creditor. It is based on paragraph 4A(1), (4), (5), (7) and (10) of Schedule 9 to FA 1996.

Clause 363: Companies connected for sections 361 and 362

1152.     This clause explains what is meant by connected companies for the purposes of the two preceding clauses. It is based on paragraph 4A(8) and (9) of Schedule 9 to FA 1996.

1153.     This definition differs from the definition for connectedness in clause 466 by its application to periods of account rather than accounting periods.

Chapter 7: Group relief claims involving impaired or released consortium debts

Overview

1154.     This Chapter provides rules to prevent both a claim to group relief surrendered by a consortium company and debits for impairment losses on loans made to the consortium company. The purpose of these rather complex provisions is to prevent a claim to “double relief”, ie in respect of both an impairment loss for the consortium member and a group relief claim surrendered by the consortium company. This situation would not arise in the case of companies within a group as a result of the rule in clause 354 which disallows impairment losses if the debtor and creditor companies are connected.

1155.     Paragraph 5ZA of Schedule 9 to FA 1996 applies paragraph 5A, on which this Chapter is based, in relation to a debit in respect of the release of a liability as it applies in relation to an impairment loss. In rewriting these paragraphs in this Chapter references to a debit on the release of a liability (referred to here as a “release debit”) have been inserted into the relevant clauses.

Clause 364: Introduction to Chapter

1156.     This clause sets out the general circumstances when the provisions of the Chapter will apply, what the Chapter does and, in subsection (2), provides an important definition. It is based on paragraphs 5ZA and 5A(1) to (4) and (16) of Schedule 9 to FA 1996.

Clause 365: Reduction of impairment loss debits where group relief claimed

1157.     This clause provides the basic rule: where group relief is surrendered to a consortium member (or a member’s group company) by the consortium company and there is an excess of impairment losses over credits arising on loans to the consortium company, those impairment losses are reduced by the group relief claimed. It is based on paragraphs 5ZA and 5A(5) to (7) and (19) of Schedule 9 to FA 1996.

Clause 366: Effect where credit for release brought into account on amortised cost basis

1158.     This clause provides that where a consortium company brings in a credit on an amortised cost basis on the release of a liability by a consortium member and that member debits an equal amount, the debit is not taken into account under this Chapter. It is based in paragraph 5A(15) of Schedule 9 to FA 1996.

Clause 367: Reduction of credits exceeding impairment losses

1159.     This clause provides that where credits on loan relationships between the consortium member (or group company) and the consortium company exceed debits on those loans, the credits are reduced by debits previously reduced under clause 365. It is based on paragraph 5A(8) to (10) of Schedule 9 to FA 1996. The reduction compensates for the restrictions in an earlier period which would not have arisen had there not, in that period, been an excess of debits over credits.

1160.     Paragraph 5A(8)(a) of Schedule 9 refers to related debt recovery credits brought into account “under paragraph 5 above”. This is an incorrect reference and was overlooked in the consequential amendments to FA 2004 which removed paragraph 5(1) to (2A) of Schedule 9. This has been rewritten as if referring to the amounts brought into account in computing the “relevant net debits” (see paragraph 5A(5)(b)), which is the obvious meaning.

Clause 368: Reduction of claims where there are earlier net consortium debits

1161.     This clause provides that claims for group relief surrendered by the consortium company to a consortium member (or group company) are reduced by the excess of debits over credits on loans to the consortium company in preceding years. It is based on paragraph 5A(11) to (13) of Schedule 9 to FA 1996.

Clause 369: Carry forward of claims where there are no net consortium debits

1162.     This clause applies where there is a claim for group relief by a consortium company (or group member) but no net debit in respect of debts with the consortium company. It is based on paragraph 5A(14) of Schedule 9 to FA 1996. In these circumstances the group relief claim is carried forward and treated as increasing a group relief claim for the subsequent accounting period for the purposes of clause 365.

Clause 370: Group accounting periods

1163.     This clause gives the meaning of “group accounting period” for the purposes of this Chapter. It is based on paragraph 5A(17) and (18) of Schedule 9 to FA 1996.

Clause 371: Interpretation

1164.     This clause defines various terms used in this Chapter. It is based on paragraph 5A(2) to (5) and (19) to (21).

 
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Prepared: 5 December 2008