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1692. This clause and the next two set out how a company partner brings into account credits and debits in respect of its share of a firms derivative contracts. This clause provides that each company partner, not the firm, brings credits and debits into account in calculating its profits chargeable to tax. It is based on paragraph 49(1) and (2) of Schedule 26 to FA 2002.
1693. Paragraph (c) in subsection (1) requires that the firm is a party to a contract that is a derivative contract or would be a derivative contract if the firm were a company. A firm is not a company. So a contract held by a firm would not meet any test under which a contract is or is treated as a derivative contract because it is held by a company.
1694. Subsection (2) switches off the normal rule in clause 1259 (which rewrites section 114(1) of ICTA) under which the profits of the firms trade etc are calculated, in accordance with the partners interests in the firm, as if the firm were a company.
1695. This clause determines the credits and debits to be brought into account under clause 619(3) by each company partner in a firm. It is based on paragraph 49(3), (4), (5) and (6) of Schedule 26 to FA 2002.
1696. Subsections (2) to (4) attribute the actions of the firm to the partner for the purposes of applying the rules that determine the credits and debits to be brought into account in accordance with this Part.
1697. Profit-sharing arrangements, in relation to a partnership, is defined in clause 710. A firms profit-sharing arrangements are described in clause 1262, in the clauses rewriting section 114 of ICTA, as the rights of the partners to share in the profits of the trade and the liabilities of the partners to share in the losses of the trade.
1698. This clause applies fair value accounting, in determining under clause 620 the company partners share of the credits and debits arising in respect of the firms derivative contracts, if that company partner uses fair value accounting in relation to its interest in the firm. It is based on paragraph 50 of Schedule 26 to FA 2002.
1699. This clause provides that, if a relevant contract to which the company continues to be a party ceases to be a derivative contract, there is a deemed disposal of the contract at the time of that cessation. It is based on paragraphs 43A(5) and 43B of Schedule 26 to FA 2002.
1700. Subsection (2) deems the company to have disposed of the contract in a related transaction (defined in clause 596) for consideration equal to the notional carrying value of the contract at the time it ceases to be a derivative contract. Depending on the amount of the consideration attributed to that disposal under this subsection, a credit or debit arises to be brought into account under this Part. That credit or debit is additional to any other credit or debit that arises in relation to the contract, while it was a derivative contract, for the accounting period in which the deemed disposal occurs. Carrying value is defined in clause 702.
1701. The source legislation for subsection (4) refers to the amount that would have been the carrying value of the contract in the accounts of the company if an accounting period had ended immediately before that time. The source legislation for the equivalent definition in clause 625(6), paragraph 28(3) of Schedule 26 to FA 2002, refers to the value found if a period of account had ended immediately before the requisite time. But, if a period of account comes to an end, that is the end of an accounting period under clause 10. The two definitions have been brought into line using period of account.
1702. After the contract ceases to be a derivative contract, it is likely to be a chargeable asset for the purposes of corporation tax on chargeable gains. Subsection (5) therefore signposts clause 662 which prescribes the acquisition cost of the contract for that purpose.
1703. This clause provides that credits and debits arising in respect of an embedded derivative in an index-linked gilt-edged security are not brought into account under this Part if conditions are met. It is based on paragraphs 12(1), (11A) and (11B) and 45I of Schedule 26 to FA 2002.
1704. If the embedded derivative is closely related to the host contract, generally accepted accounting practice does not in fact require the company to divide the security as mentioned in clause 585. In that case, clauses 399 and 400 in Part 5 (loan relationships) apply. But, for example, a company whose functional currency is not sterling may be required to divide its index-linked securities between an embedded derivative and a host contract, in which case this clause may apply.
Clause 624: Introduction to Chapter
1705. This clause describes the purpose of the Chapter. Subsection (3) is based on paragraph 28(6) of Schedule 26 to FA 2002 but otherwise the clause is new.
1706. This clause and the next three deal with the case where one member of a group of companies replaces another as a party to a derivative contract as the result of a related transaction or similar transactions. This clause determines the credits and debits to be brought into account by the transferor company and the transferee company. It is based on paragraph 28(1), (3), (3ZA), (3A) and (7) of Schedule 26 to FA 2002.
1707. Notional carrying value is defined in subsection (6) on the model of the similar definition in clause 622(4). Carrying value is defined in clause 702.
1708. Should any discount arise in respect of the related transaction or the equivalent series of transactions, it is added to the amount treated as consideration by the transferor under subsection (3) (but not to the amount treated as consideration given by the transferee under subsection (4)).
1709. Discount is defined in subsection (6) by reference to clause 480 in Part 5 (loan relationships). A discount arises if payment of part of the consideration for a disposal is deferred and the consideration is accordingly increased to recognise the delay.
1710. Subsection (7) disapplies Schedule 28AA to ICTA in a case where credits and debits are determined under subsection (2). Schedule 28AA to ICTA might otherwise substitute market value for the amounts agreed between the parties, which amounts would give rise to credits and debits for the purposes of this Part. Such a substitution is unnecessary given that this clause requires both parties to use the notional carrying value of the contract rather than amounts shown in the accounts (the amounts recognised for accounting purposes).
1711. This clause defines the related transaction or series of transactions which acts or act as a trigger for the application of clause 625. It is based on paragraph 28(2) of Schedule 26 to FA 2002.
1712. This clause gives a particular example of what the reference in clause 625(1) to one company replacing another as a party to a derivative contract means. It is based on paragraph 28(4) of Schedule 26 to FA 2002.
1713. The commonest way in which one company may replace another as a party to a derivative contract is by the assignment of the rights and liabilities under the contract. But there may be other types of transaction that have the same effect.
1714. This clause ensures that, if the company referred to as the transferee in clause 625 becomes a party to a contract whose rights and liabilities are equivalent to those of the contract to which the company referred to as the transferor in that clause has ceased to be a party, the transferee is treated as having replaced the transferor in respect of the derivative contract. A novation is an example of this.
1715. This clause still applies in the event of the transferor again becoming a party to the original contract (that is, a contract to which it had previously ceased to be a party).
1716. This clause substitutes rules based on fair value accounting for those in clause 625, in a case to which that clause applies, if the transferor uses fair value accounting in respect of the derivative contract in question. It is based on paragraph 30 of Schedule 26 to FA 2002.
1717. As regards the transferee, this clause treats it as having acquired the derivative contract at the fair value of the contract as at the time of the transfer for the purposes of determining the credits and debits brought into account under this Part, regardless of whether it itself uses fair value accounting as respects the contract. This treatment continues to apply for any accounting period in which the transferee is a party to the contract.
1718. As in clause 625, any discount is added to the amount treated as consideration by the transferor (only).
1719. This clause disapplies clause 625 in two cases where avoidance of tax is involved. It is based on paragraph 28(3ZB), (3ZC) and (3ZD) of Schedule 26 to FA 2002.
1720. The first case (subsection (1)) is if the transferor is a party to arrangements for tax avoidance purposes under which the derivative contract will be transferred on by the transferee. The second case (subsection (4)) is if another provision countering tax avoidance (clause 698) applies to a disposal which would otherwise be within clause 625.
1721. This clause and the next two provide for a deemed assignment of the derivative contract in question if a transferee within clause 625 ceases to be a member of the group of companies mentioned in clause 626(2) or (3). This clause sets out when clauses 631 and 632 apply and defines terms used in this and those clauses. It is based on paragraph 30A(1), (5A) and (8) of Schedule 26 to FA 2002.
1722. If clause 625 applies because of a series of transactions within clause 626(3), the relevant time limit in respect of the transferee leaving the relevant group of companies before the end of a six year period begins with the last of the transactions in the series of transactions. This contrasts with the rule in clause 625(3) which determines the consideration to be brought into account by the transferor by reference to the first transaction in the series.
1723. The rules in these clauses take priority if the rules in clause 609 or 610 would apply in the same circumstances (see the commentary on those clauses).
1724. This clause deems the transferee within clause 625 to have assigned (and immediately reacquired) the rights and liabilities under the derivative contract, immediately before it left the group, for a consideration equal to their fair value at that time. It is based on paragraph 30A(2), (3), (4), (5) and (8) of Schedule 26 to FA 2002.
1725. One of the conditions for this clause to apply is that the company ceases to be a member of the group of companies in question for reasons which are not just that it does so because of an exempt distribution under section 213(2) of ICTA. That section provides for a distribution arising from the demerger of the trading activities of a single company or group of companies to a number of companies or groups to be disregarded for certain purposes.
1726. The second condition is that a credit would be brought into account under either this Part (condition A in subsection (3)) or Part 5 (loan relationships) (condition B in subsection (4)). The credit in question, as regards this Part, is the credit that would be brought into account under this Part on the deemed assignment under this clause of the rights and liabilities under the derivative contract.
1727. As regards Part 5, the credit in question is the credit brought into account under that Part because of clause 345(2)(a) and (b) in a case where the transferee has a hedging relationship between the derivative contract and a creditor relationship That clause makes matching provision for loan relationships to that made by this clause for derivative contracts.
1728. In either case, the second condition is not satisfied if the assignment would give rise to a debit. So the clause cannot give rise to a reduction of the transferees liability to corporation tax.
1729. Hedging relationship is described in clause 707 in a number of ways. Broadly, these relate to cases where the derivative contract is entered into to shelter the company from risks associated with holding or owing the hedged asset or liability (such as a fluctuation in values because of movement in a relevant market, such as a stock or commodities exchange).
1730. This clause deems the transferee within clause 625 to have assigned (and immediately reacquired) the rights and liabilities under the derivative contract at the time a chargeable payment is made, for a consideration equal to the fair value of the rights and liabilities at the time of that payment, if it left the group solely because of an exempt distribution. It is based on paragraph 30A(3), (4), (5), (6), (7) and (8) of Schedule 26 to FA 2002.
1731. A chargeable payment is broadly a payment made in connection with tax avoidance or otherwise than for genuine commercial reasons.
1732. Conditions A and B, in subsections (3) and (4), are the same as the conditions in clause 631(3) and (4). See the commentary on that clause.
1733. This Chapter contains rules that modify the application of this Part to mutual trading companies or insurance companies. The Chapter does not rewrite paragraph 41 of Schedule 26 to FA 2002 as it is merely introductory.
1734. This clause treats the activities of a mutual trading company as not being those of a trade. It is based on paragraph 43 of Schedule 26 to FA 2002.
1735. Because of this clause, any credits and debits arising to a mutual trading company do not fall within clause 573 (trading credits and debits to be brought into account under Part 3). And any provision that operates in part by reference to whether the company is a party to a contract for the purposes of a trade (or a type of business which constitutes a trade) does not apply to a mutual trading company in that respect.
1736. This clause treats certain activities of an insurance company as not being those of a trade. It is based on paragraphs 41A and 43 of Schedule 26 to FA 2002.
1737. This clause has the same effect, in relation to the activities specified in paragraphs (a) and (b), as the preceding clause has for mutual trading companies.
1738. For the meaning of life assurance business and basic life assurance and general annuity business, see section 431(2) of ICTA.
1739. This clause requires a life assurance company to treat a creditor relationship as mentioned in clause 585(1) despite the fact that it accounts for that relationship at fair value through profit and loss. It is based on paragraph 45D(3A) of Schedule 26 to FA 2002.
1740. Under generally accepted accounting practice, a company that accounts for a creditor relationship at fair value through profit and loss would not divide the relationship between embedded derivatives and the remaining rights that are a loan relationship. This clause overrules that accounting rule for the purposes of both this Part and Part 5 (loan relationships).
1741. This clause makes modifications of Chapter 5 (continuity of treatment on transfers within groups) in respect of insurance companies. It is based on paragraphs 28(1) and (2) and 29 of Schedule 26 to FA 2002.
1742. Clause 625 deals with the case where one member of a group of companies replaces another as a party to a derivative contract as the result of a related transaction or similar transactions. It determines the credits and debits to be brought into account by the transferor company and the transferee company by treating both as using the same consideration in relation to that transaction or transactions.
1743. This clause first adds two further cases to the list in clause 626 of transactions that trigger the operation of clause 625. They are cases involving the transfer of classes of insurance business between two companies where the transfer does not already fall within clause 625.
1744. Subsection (4) then disapplies clause 625, in respect of a triggering transaction falling within the original categories listed in clause 626, in relation to the transfer of derivative contracts moving into or out of a companys long-term insurance fund.
1745. Subsection (5) disapplies clause 625 in respect of a triggering transaction falling within the categories treated as added to clause 626 by subsection (3), if derivative contracts are in one of the categories set out in section 440(4) of ICTA before the transfer and in a different category after the transfer.
1746. For the meaning of contract of long-term insurance, insurance business transfer scheme, qualifying overseas transfer and overseas life insurance company, see section 431(2) of ICTA (as modified, in relation to the meaning of qualifying overseas transfer, by regulation 6(5) of the Overseas Life Insurance Companies Regulations 2006 (SI 2006/3271)). Because the meaning of overseas life insurance company is provided by that section for the interpretation of the life assurance provisions of the Corporation Tax Acts (and this clause is such a provision), it is unnecessary to rewrite paragraph 29(4) of Schedule 26 to FA 2002.
1747. This clause and the next except certain capital profits and losses of an investment trust or venture capital trust from the scope of this Part so that credits and debits in respect of such profits or losses do not fall within clause 595. This clause deals with investment trusts. It is based on paragraph 38 of Schedule 26 to FA 2002 and articles 2 and 3 of The Investment Trusts and Venture Capital Trusts (Definition of Capital Profits, Gains or Losses) Order 2006 (SI 2006/1182).
1748. Subsection (1) refers to profits or losses rather than profits, gains and losses as in the source legislation. But there is no difference in the meaning of the two phrases in the context of an investment trusts transactions of a capital nature.
1749. Subsection (2) uses the meaning of profits or losses of a capital nature given by SI 2006/1182 for both trusts using UK generally accepted accounting practice and those using international accounting standards. It does not rewrite the meaning given in paragraph 38(3) of Schedule 26 to FA 2002 as the relevant Statement of Recommended Practice uses terms from international accounting standards (and accordingly does not rewrite the part of paragraph 38(2)(a) of that Schedule which refers to that meaning).
1750. Subsection (4) contains powers for the amendment by Treasury order of the meaning of profits or losses of a capital nature in this clause. This rewrites the powers in paragraph 38(2) of Schedule 26 to FA 2002 used to make the order in SI 2006/1182 applying to investment trusts and venture capital trusts that use international accounting standards.
1751. There were similar rules in relation to capital profits, gains and losses of authorised unit trusts and open-ended investment companies in paragraphs 32 and 33 of Schedule 26 to FA 2002 with regulatory powers in paragraph 34 of that Schedule. The first two of those paragraphs were omitted by F(No 2)A 2005. Paragraph 34 of that Schedule is now omitted and not rewritten as it is redundant.
1752. Schedule 1 to this Bill inserts section 842(2D) and (2E) of ICTA (investment trusts: net excess of relevant credits over relevant credits under this Part treated as income derived from shares or securities for the purposes of approval of a company under that section, so far as the credits and debits are brought into account under clause 574). This insertion is based on paragraph 39 of Schedule 26 to FA 2002.
1753. This clause excepts certain capital profits and losses of a venture capital trust from the scope of this Part. It is based on paragraph 38A of Schedule 26 to FA 2002 and articles 2 and 3 of the Investment Trusts and Venture Capital Trusts (Definition of Capital Profits, Gains or Losses) Order 2006 (SI 2006/1182).
1754. This clause has the same effect for venture capital trusts as clause 637 has for investment trusts. See the commentary for that clause.
1755. This clause does not rewrite paragraph 38A(2)(a)(part) and (3) of Schedule 26 to FA 2002 for the same reasons as those mentioned in the commentary for clause 637 in relation to not rewriting paragraph 38(3) of Schedule 26 to FA 2002.
1756. This Chapter sets out when profits and losses in relation to derivative contracts are dealt with as chargeable gains or allowable losses for the purposes of the charge to corporation tax on chargeable gains rather than being taken into account as income under Part 3 (trading income) or Part 5 (loan relationships).
1757. This clause gives an overview of the contents of the Chapter. It is new.
1758. Clauses 640 and 651 switch off respectively clause 574 and both that clause and clause 573, under which credits and debits are brought into account as income, so that the credits and debits in question may be used instead to give rise to chargeable gains or allowable losses.
1759. Clause 641 (to which there are exceptions in clause 642) brings credits and debits on four types of derivative contract into account as chargeable gains or allowable losses. The four types are:
1760. The remaining provisions of the Chapter (other than various interpretative clauses) provide bespoke chargeable gains rules for a number of cases:
1761. Chapter 8 contains further rules for a miscellany of situations in which chargeable gains rules are applied or modified.
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