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1907. This clause defines unallowable purpose and has an unallowable purpose for the purposes of clauses 690 and 692. It is based on paragraph 24 of Schedule 26 to FA 2002.
1908. A purpose is unallowable if it is one of the purposes for which the company is a party to the contract (or enters into related transactions in relation to it) but it is not a business or other commercial purpose of the company.
1909. Subsection (2) excludes any activities in respect of which the company is not within the charge to corporation tax from the business and commercial purposes of the company that are relevant to this definition. For example, if a non-UK resident company is a party to the contract for the purposes of a permanent establishment it has in the United Kingdom, the purposes of the activities of the company that are not part of the activities of the permanent establishment are disregarded.
1910. Subsections (3) to (6) exclude a tax avoidance purpose from the business and commercial purposes of the company for the purposes of this definition. The effect of this is that a tax avoidance purpose is an unallowable purpose unless it is a minor part of the companys motivation for being a party to, or entering into related transactions in relation to, the derivative contract.
1911. This clause gives relief for some of the debits prevented from being brought into account by clause 690. It is based on paragraph 23(1), (4), (5), (6) and (7) of Schedule 26 to FA 2002.
1912. The amount that is relieved under this clause by being brought into account as a debit, by virtue of subsection (4), is the amount of the excess accumulated net losses found in accordance with the method statement in subsection (5).
1913. In effect, debits excluded for an accounting period because of clause 690(3) are nevertheless relieved in that or a later period to the extent that there are non-excluded credits against which they can be set.
1914. The calculation of the amount to be relieved is on a cumulative basis and that amount is reduced by any debit already given under this clause.
1915. This clause brings into account under this Part credits and debits in respect of amounts treated under Schedule 28AA to ICTA (provision not at arms length) as profits, losses or expenses. It is based on paragraph 31A of Schedule 26 to FA 2002.
1916. It brings credits and debits into account to the extent that actual amounts of such profits, losses or expenses would be brought into account.
1917. Schedule 28AA to ICTA identifies adjustments (imputed amounts) to be made to return the profit or loss from a transaction between parties not at arms length to what that profit or loss would be had the parties been at arms length. This clause ensures that such amounts are taken into account under this Part although they arise under Schedule 28AA rather than under this Part.
1918. Subsections (3) and (5) indicate that the credits and debits brought into account by this clause are subject to the same rules as apply under this Part to credits and debits in respect of actual amounts. So, for example, debits brought into account in respect of expenses are those falling within the categories listed in clause 595(4).
1919. This clause gives effect in this Part to adjustments or other treatment of exchange gains and losses prescribed by Schedule 28AA to ICTA, further to those in clause 693. It is based on paragraph 8(1) and (4) of Schedule 28AA to ICTA and paragraph 27 of Schedule 26 to FA 2002.
1920. Under paragraph 1 of Schedule 28AA to ICTA, a company may be treated as not a party to a derivative contract. The actual exchange gains and losses on that contract are then disregarded. Subsection (3) provides that such exchange gains and losses are also left out of account in determining the credits and debits to be brought into account under this Part.
1921. Schedule 28AA to ICTA may also impute amounts of exchange gains and losses (the adjusted amount) calculated on the basis that the parties to the derivative contract are acting at arms length although in fact they do not do so. Subsection (5) requires the adjusted amount to be brought into account under this Part.
1922. This clause treats as a credit the amount paid by a company for the grant of an option by a company connected with it if the option is allowed to expire to the benefit of the connected company. It is based on paragraph 26 of Schedule 26 to FA 2002.
1923. Value is transferred on the expiry of the option because the connected company retains the amount paid for the option and does not suffer the commercial loss that would have occurred had the option been exercised. The required assumption in subsection (6), that the option would have been exercised had the parties not been connected, points to the fact that it would have been advantageous to the option holder to exercise it (and therefore disadvantageous to the company granting the option).
1924. The clause applies only if the connected company is not within the charge to corporation tax in respect of the derivative contract under or because of this Part. For example, it applies if the connected company is not a UK resident company (and the derivative contract is not held for the purposes of a permanent establishment it has in the United Kingdom).
1925. Subsection (7) indicates that, for the purposes of this clause, the definition of option in clause 580 is shorn of its usual limiting conditions (that a cash-settled option is not an option).
1926. This clause excludes a debit if a company within the charge to corporation tax makes payments of notional interest in excess of payments of notional interest to it by a company which is non-UK resident. It is based on paragraph 31(1), (2), (3), (4) and (9) of Schedule 26 to FA 2002.
1927. This clause typically applies to a contract for differences which is an interest rate swap. It has some similarities with clause 695 in that the flow of benefit in the direction of a company outside the charge to corporation tax is countered in taxing the other company.
1928. Subsection (4) defines notional interest payment. The rate applied in calculating such a payment is not necessarily an interest rate as such but paragraph (c) of the definition requires that it matches the interest rate specified in the contract.
1929. This clause sets out three circumstances in which clause 696 does not apply. It is based on paragraph 31(5), (6), (7), (8) and (9) of Schedule 26 to FA 2002 and section 153(2) of FA 2003.
1930. The third exception is if there is a double taxation agreement between the United Kingdom and the territory in which the non-UK resident is resident which covers payments of interest (whether by relief or otherwise). Unlike the first two exceptions, where the financial institution or non-UK resident must hold the derivative contract as principal, this exception can apply if the non-UK resident holds the derivative contract as agent or nominee of another person. But in that case, the relevant territory is that in which the principal is resident.
1931. Permanent establishment is defined in section 148 of FA 2003.
1932. This clause brings into account that part of the consideration for a disposal of rights or liabilities under a derivative contract that is not fully recognised under applicable generally accepted accounting practice, if the company in question made the disposal with avoidance motives. It is based on paragraph 27A of Schedule 26 to FA 2002.
1933. Subsection (5) gives priority to paragraph 1(2) of Schedule 28AA to ICTA, if that provision would apply a tax charge on the disposal in question. That paragraph may operate in effect through clause 693.
Clause 699: Priority of this Part for corporation tax purposes
1934. This clause provides that this Part has priority, as regards amounts brought into account in accordance with it in respect of any matter, over any corporation tax provision that would otherwise apply. It is based on paragraph 1(2) of Schedule 26 to FA 2002.
1935. This rule covers not only the case where an amount is dealt with under clauses 573 or 574 but also a case to which Chapter 7 applies.
1936. Subsection (3) lists particular cases where the rule is disregarded.
1937. Clause 700 deals with the case where Part 5 (loan relationships) has priority over this Part. If that Part applies to any amounts, those amounts are not in fact brought into account in accordance with this Part and so this clause cannot apply.
1938. This clause gives priority to Part 5 if the amount that would otherwise be brought into account under this Part, or (if different) the profit or loss accruing to the company on the derivative contract, is brought into account under that Part. This clause is based on section 101 of FA 1996.
1939. This rule covers, for example, the case where a loan relationship arises from the conduct of a derivative contract (say, if one party defaults on a payment in the course of an interest rate swap and so owes money to the other). A payment due in respect of the loan relationship is dealt with under Part 5 and not under this Part.
1940. Subsection (3) sets out the significant exception to the general rule, that is, in a case where clause 585 (loan relationships with embedded derivatives) applies. This Part applies instead of Part 5 to profits and losses in respect of an embedded derivative that is a derivative contract.
Clause 701: Power to amend some provisions
1941. This clause contains powers for the amendment of this Part (and related paragraphs in Part 10 of Schedule 2). It is based on paragraph 13 of Schedule 26 to FA 2002 and paragraph 52 of Schedule 4 to FA 2005.
1942. The permitted amendments are broadly concerned with redefining what is or is not a derivative contract (whether by reference to the underlying subject matter of a relevant contract or otherwise). They are also concerned with adjusting the regime for special cases.
1943. Subsections (1) and (2) define what provisions in this Part and Schedule 2 may be amended by an order under this clause. The lists in these subsections reflect the fact that the rules in the amendable provisions of the source legislation (Parts 2 and 9 of Schedule 26 to FA 2002) are now ordered differently in this Part.
1944. Subsection (5) contains the commencement provisions for an order made under this clause. The normal rule is that an order applies to accounting periods ending on or after the date on which the order comes into force. That rule includes a degree of retrospection in that the order may apply by reference to events that occurred in that accounting period before the order came into force. Retrospective application is partly increased by paragraph (b) of this subsection, which allows the order to apply to periods of account beginning in the year in which they are made (which would cover, for example, an accounting period of less than 12 months which has ended before the order is made).
1945. This clause defines the meaning of carrying value for the purposes of this Part. It is based on paragraphs 28(6) and 50A(3A) and (3B) of Schedule 26 to FA 2002.
1946. Subsections (2) and (3) ensure that the effect of various provisions dealing with special cases carries through for the purposes of calculating the carrying value under this clause.
1947. Subsection (4) provides a definition of impairment loss (a term taken from international accounting standards) which is only implied by the source legislation by virtue of its reference to amounts recognised for accounting purposes. The definition is modelled on that provided for loan relationships by clause 476. See Change 67 in Annex 1.
1948. This clause defines the meaning of chargeable asset for the purposes of this Part. It is based on paragraphs 4A(4), 4B(5), 37(6) and 43A(3) of Schedule 26 to FA 2002.
1949. The definition extends under subsection (2) to amounts that are treated under section 143 of TCGA as assets whose disposal falls within TCGA. Those assets are obligations under a futures contract, that is, the obligation to supply or to take delivery of a commodity or other item under the contract at an agreed price. If there has been such market movement in the price of the commodity that the obligation is heading to produce a profit, a disposal of the obligation (before the contract has run to delivery) would be a disposal of an asset for the purposes of TCGA.
1950. This clause defines creditor relationship and debtor relationship for the purposes of this Part. It is based on paragraphs 30A(7) and 54(1) of Schedule 26 to FA 2002.
1951. These terms occur in this Part in connection with a loan relationship or a relevant contract within clause 585(2). The clause therefore defines the terms by reference to clause 302 in Part 5. In short, a creditor relationship refers to a debt owned and a debtor relationship to a debt owed by the company.
1952. This clause provides for the interpretation of references in this Part to exchange gains or exchange losses in relation to a company. It is based on paragraph 54(2), (2A) and (3) of Schedule 26 to FA 2002.
1953. Subsection (2) provides that, in the event that the comparison of values described in subsection (1) gives neither a gain nor a loss, an exchange gain of nil arises. This rule applies in a case where it is necessary for there be an amount of an exchange gain or exchange loss for a provision to apply (say, clause 694(6)).
1954. Subsection (3) provides powers for the Treasury to make regulations as to the calculation of exchange gains and losses and any other profits, gains or losses if the company uses fair value accounting. See The Loan Relationships and Derivative Contracts (Exchange Gains and Losses using Fair Value Accounting) Regulations 2005 (SI 2005/3422). As in the case of the powers in clause 701, regulations made under these powers may apply to any period of account beginning in the year in which they are made.
1955. Subsection (5) sets out what a reference to an exchange gain or loss from a companys derivative contracts means (for the purposes of, say, clause 606(1)).
1956. This clause defines excluded body for the purposes of this Part. It is based on paragraphs 45C(3), 45D(2), 45G(1A), 45J(2) and 45K(2) of Schedule 26 to FA 2002.
1957. The bodies which are excluded bodies are all types of collective investment scheme.
1958. Authorised unit trust is defined in section 832(1) of ICTA by reference to section 468(6) of that Act, which in turn refers to a scheme in respect of which an order under section 243 of FISMA is in force in the relevant accounting period.
1959. Investment trust has the meaning given by section 842 of ICTA and venture capital trust the meaning given by section 834(1) of ICTA (by reference to Part 6 of ITA).
1960. Open-ended investment company is defined in clause 710 by reference to section 468A(2) of ICTA which in turn refers to a company incorporated in the United Kingdom to which section 236 of FISMA applies.
1961. This clause sets out two cases in which a company is regarded as having a hedging relationship for the purposes of this Part. It is based on paragraph 12(14) of Schedule 26 to FA 2002.
1962. The concept of hedging has to do with contracts undertaken to protect the companys assets (or to guard against increase in its liabilities) in a case where there is some form of market volatility associated with the item. The cases described in this clause derive from those set out in accounting standards. Paragraph 86 of Financial Reporting Standard 26, the equivalent for UK generally accepted accounting practice of International Accounting Standard 39, describes a hedging relationship as follows:
Hedging relationships are of three types:
fair value hedge: a hedge of the exposure to changes in fair value of a recognised asset or liability or an unrecognised firm commitment, or an identified portion of such an asset, liability or commitment that is attributable to a particular risk and could affect profit or loss.
cash flow hedge: a hedge of the exposure to variability in cash flows that is (i) attributable to a particular risk associated with a recognised asset or liability (such as all or some future interest payments on variable rate debt) or a highly probable forecast transaction and (ii) could affect profit or loss.
hedge of a net investment in a foreign operation as defined in FRS 23.
1963. Paragraph 9 of Financial Reporting Standard 26 also provides definitions of hedging instrument and hedged item.
1964. This clause defines plain vanilla contract. It is based on paragraph 2(2B) of Schedule 26 to FA 2002.
1965. The term means any relevant contract except those to which a company is treated as a party under clause 584, 585 or 586.
1966. This clause defines securities house for the purposes of this Chapter. It is based on paragraphs 45J(10), 45JA(5) and 45K(4) of Schedule 26 to FA 2002.
1967. This clause defines a number of terms for the purposes of this Part. It is based on paragraphs 12(1), (2), (9), (11), (12), (13) and (17) and 54(1) and (4) of Schedule 26 to FA 2002.
1968. Where appropriate, terms used in this Part in connection with the business of a life assurance company take the meaning given in Chapter 1 of Part 12 of ICTA (see in particular section 431(2) of ICTA).
1969. The clause does not rewrite those definitions in paragraph 54(1) of Schedule 26 to FA 2002 of terms that are no longer in use in that Schedule (for example, UK company) or have been replaced by other terms (for example, nested derivative). Nor does it rewrite the definition of investment trust as that is already provided by section 842 of ICTA.
1970. This Part gives a comprehensive scheme for the taxation of profits and losses arising to a company from its intangible fixed assets. It is based on Schedule 29 to FA 2002.
1971. This Part sets out a uniform and largely self-contained set of rules on the tax treatment of intangible fixed assets used for business purposes by companies. For assets within its rules, it overrides all other tax legislation. Broadly, it applies only to assets acquired from third parties, or created, after 31 March 2002. Other intangible fixed assets continue, subject to some particular exceptions, to be dealt with under general rules. The tax treatment of intangible fixed assets within this Part generally follows the accountancy treatment. In this respect, it resembles the loan relationship and derivative contract provisions which also largely erase the distinction between capital and revenue expenditure.
Clause 711: Overview of Part
1972. This clause provides a route map of the Part. It is new.
1973. This clause explains what is meant by intangible asset. It is based on paragraph 2 of Schedule 29 to FA 2002.
1974. This clause explains what is meant by intangible fixed asset. It is based on paragraph 3 of Schedule 29 to FA 2002.
1975. Subsection (2) is an important general extension to the rules. That is, if an asset is an intangible fixed asset under the rules in this Part, so is an option or other right to acquire or dispose of that asset. There is a counterpart, obverse rule in clause 805.
1976. This clause is definitional. It is based on paragraph 139 of Schedule 29 to FA 2002.
1977. This clause brings goodwill within the intangible fixed assets regime. It is based on paragraph 4 of Schedule 29 to FA 2002.
1978. The inclusion of goodwill extends the relevance of these rules to a far wider range of companies than would otherwise be the case.
1979. This clause identifies the accountancy amounts from which the related tax amounts are derived. It is based on paragraph 134 of Schedule 29 to FA 2002.
1980. Subsection (4) rewrites part of paragraph 5(1) of Schedule 29 to FA 2002. The subsection uses the label GAAP-compliant accounts as being a more neutral term than the label correct accounts used in the source legislation.
1981. This clause deals with the case where a company does not draw up accounts in accordance with generally accepted accounting practice or, exceptionally, does not draw up accounts at all. It is based on paragraph 5 of Schedule 29 to FA 2002.
1982. In both cases the rules apply as though GAAP-compliant accounts had been drawn up.
1983. Subsection (3) applies where accounts are GAAP-compliant in themselves but follow on from a period for which the accounts were not. It allows the later accounts to be adjusted to reflect the adjustments required in the earlier accounts.
1984. This clause allows reference to be made to consolidated group accounts in determining whether a companys accounts are GAAP-compliant. It is based on paragraph 6 of Schedule 29 to FA 2002.
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