Corporation Tax Bill

House of Commons

Session 2008 - 09
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Other Bills before Parliament

Corporation Tax Bill

Corporation Tax Bill
Part 5 — Loan Relationships
Chapter 5 — Connected companies relationships: introduction and general
160

350
Companies beginning to be connected
(1)
This section applies if—
(a)
a company’s loan relationship becomes a connected companies
relationship, and
(b)
as a result of the application of section 349 the company—
5
(i)
brings into account credits or debits determined in accordance
with fair value accounting for one accounting period (“the
earlier period”), and
(ii)
brings into account credits or debits determined in accordance
with an amortised cost basis of accounting for the next
10
accounting period (“the later period”).
(2)
If—
(a)
the fair value of a relevant asset at the end of the earlier period (“FVA”),
exceeds
(b)
the cost of the asset which would be given at that time on an amortised
15
cost basis of accounting (“ACA”),

the excess must be brought into account for the later period as a debit for the
purposes of this Part.
(3)
If ACA exceeds FVA, the excess must be brought into account for the later
period as a credit for the purposes of this Part.
20
(4)
If—
(a)
the fair value of a relevant liability at the end of the earlier period
(“FVL”), exceeds
(b)
the cost of the liability which would be given at that time on an
amortised cost basis of accounting (“ACL”),
25

the excess must to be brought into account for the later period as a credit for
the purposes of this Part.
(5)
If ACL exceeds FVL, the excess must to be brought into account for the later
period as a debit for the purposes of this Part.
351
Companies ceasing to be connected
30
(1)
This section applies if—
(a)
a company’s loan relationship ceases to be a connected companies
relationship, and
(b)
as a result of section 349 ceasing to apply the company—
(i)
brings into account credits or debits determined in accordance
35
with an amortised cost basis of accounting for one accounting
period (“the earlier period”), and
(ii)
brings into account credits or debits determined in accordance
with a fair value basis of accounting for the next accounting
period (“the later period”).
40
(2)
If—
(a)
the fair value of a relevant asset at the end of the earlier period (“FVA”),
exceeds
(b)
the cost of the asset which would be given at that time on an amortised
cost basis of accounting (“ACA”),
45

Corporation Tax Bill
Part 5 — Loan Relationships
Chapter 6 — Connected companies relationships: impairment losses and releases of debts
161


the excess must be brought into account for the later period as a credit for the
purposes of this Part.
(3)
If ACA exceeds FVA, the excess must be brought into account for the later
period as a debit for the purposes of this Part.
(4)
If—
5
(a)
the fair value of a relevant liability at the end of the earlier period
(“FVL”), exceeds
(b)
the cost of the liability which would be given at that time on an
amortised cost basis of accounting (“ACL”),

the excess must be brought into account for the later period as a debit for the
10
purposes of this Part.
(5)
If ACL exceeds FVL, the excess must be brought into account for the later
period as a credit for the purposes of this Part.
352
Disregard of related transactions
(1)
This section applies in an accounting period if—
15
(a)
section 349 applies in respect of a creditor relationship of a company for
the period, and
(b)
a related transaction takes place in relation to the relationship in the
period.
(2)
The credits brought into account in respect of the relationship for the period for
20
the purposes of this Part must not be less than they would have been if—
(a)
the transaction had not taken place, and
(b)
no amounts had accrued after the transaction took place.
(3)
The debits brought into account in respect of the loan relationship for the
period for the purposes of this Part must not be more than they would have
25
been in that case.
(4)
Nothing in this section affects the credits or debits to be brought into account
for the purposes of this Part in respect of exchange gains or losses arising from
a debt.
Chapter 6
30
Connected companies relationships: impairment losses and releases of debts
Introduction
353
Introduction to Chapter
(1)
This Chapter contains rules about impairment losses and releases of debts in
the case of companies connected with other companies.
35
(2)
In particular, see—
(a)
sections 354 to 357 (which prevent debits in respect of impairment
losses and release debits from being brought into account in the case of
connected companies relationships, subject to some exceptions),
(b)
sections 358 to 360 (which exclude credits in respect of the release of
40
debts or the reversal of impairments from being brought into account

Corporation Tax Bill
Part 5 — Loan Relationships
Chapter 6 — Connected companies relationships: impairment losses and releases of debts
162

in that case, except where the release is a deemed release under section
361 or 362), and
(c)
sections 361 to 363 (which treat debt releases as occurring when
impaired debts become held by companies which might otherwise
benefit from the exclusion under section 358).
5
(3)
In this Chapter “release debit” means a debit in respect of a release by a
company of liability under a creditor relationship of the company.
(4)
Section 466 (companies connected for an accounting period) applies for the
purposes of sections 354 to 360.
(5)
For the circumstances in which companies are connected for sections 361 and
10
362, see section 363.
(6)
For the meaning of “impairment loss” see section 476(1).
Exclusion of debits for impaired or released connected companies debts
354
Exclusion of debits for impaired or released connected companies debts
(1)
The general rule is that no impairment loss or release debit in respect of a
15
company’s creditor relationship is to be brought into account for the purposes
of this Part for an accounting period if section 349 (application of amortised
cost basis to connected companies relationship) applies to the relationship for
the period.
(2)
That rule is subject to—
20
(a)
section 356 (swapping debt for equity), and
(b)
section 357 (insolvent creditors).
(3)
Nothing in this section affects the debits to be brought into account for the
purposes of this Part in respect of exchange gains or losses arising from a debt.
355
Cessation of connection
25
(1)
This section applies if, in the case of a creditor relationship of a company—
(a)
an impairment loss or release debit is excluded by section 354 from
being brought into account for any accounting period, and
(b)
there is a later accounting period for which the creditor relationship in
respect of the debt is not a connected companies relationship.
30
(2)
So far as any amount represents the impairment loss or release debit, no debit
may be brought into account in respect of it—
(a)
for the first accounting period within subsection (1)(b), or
(b)
for any subsequent such accounting period.
356
Exception to section 354: swapping debt for equity
35
(1)
An impairment loss or release debit in relation to a liability to pay any amount
to a company (“the creditor company”) under its creditor relationship is not
prevented from being brought into account by section 354 if conditions A, B
and C are met.
(2)
Condition A is that the creditor company treats the liability as discharged.
40

Corporation Tax Bill
Part 5 — Loan Relationships
Chapter 6 — Connected companies relationships: impairment losses and releases of debts
163

(3)
Condition B is that it does so in consideration of—
(a)
any shares forming part of the ordinary share capital of the company
on which the liability would otherwise have fallen, or
(b)
any entitlement to such shares.
(4)
Condition C is that there would be no connection between the two companies
5
for the accounting period in which the consideration is given if the question
whether there is such a connection were determined by reference only to times
before the creditor company—
(a)
acquired possession of the shares, or
(b)
acquired any entitlement to them.
10
357
Exception to section 354: insolvent creditors
(1)
An impairment loss or release debit is not prevented from being brought into
account by section 354 in relation to an amount accruing to a company (“the
creditor”) if—
(a)
condition A, B, C, D or E is met in relation to the creditor, and
15
(b)
the amount accrues to the creditor at a time which is the relevant time
for the condition in question.
(2)
Condition A is that the creditor is in insolvent liquidation, and for this
condition the relevant time is any time in the course of the winding up.
(3)
Condition B is that the creditor is in insolvent administration, and for this
20
condition the relevant time is any time in the course of the administration.
(4)
Condition C is that the creditor is in insolvent administrative receivership, and
for this condition the relevant time is any time when the appointment of the
administrative receiver is in force.
(5)
Condition D is that an appointment of a provisional liquidator is in force in
25
relation to the creditor under section 135 of the Insolvency Act 1986 (c. 45) or
Article 115 of the Insolvency (Northern Ireland) Order 1989 (S.I. 1989/2405
(N.I. 19)), and for this condition the relevant time is any time when the
appointment is in force.
(6)
Condition E is that under the law of a country or territory outside the United
30
Kingdom, circumstances exist corresponding to those described in condition
A, B, C or D, and for this condition the relevant time is any time corresponding
to that described in the case of the condition in question.
(7)
Section 323 applies for interpreting this section as it applies for interpreting
section 322(6).
35
Exclusion of credits for connected companies debts on release or reversal of impairments
358
Exclusion of credits on release of connected companies debts: general
(1)
This section applies if—
(a)
a liability to pay an amount under a company’s debtor relationship is
40
released,
(b)
the release takes place in an accounting period for which—

Corporation Tax Bill
Part 5 — Loan Relationships
Chapter 6 — Connected companies relationships: impairment losses and releases of debts
164

(i)
an amortised cost basis of accounting is used in respect of the
relationship, and
(ii)
the relationship is a connected companies relationship.
(2)
The company is only required to bring a credit into account in respect of the
release for the purposes of this Part if it is a deemed release.
5
(3)
In subsection (2) “deemed release” means a release which is deemed to occur
because of—
(a)
section 361 (acquisition of creditor rights by connected company at
undervalue), or
(b)
section 362 (parties becoming connected where creditor’s rights subject
10
to impairment adjustment).
359
Exclusion of credits on release of connected companies debts during
creditor’s insolvency
(1)
This section applies if—
(a)
a liability to pay an amount under a company’s debtor relationship is
15
released,
(b)
the release takes place in an accounting period for which an amortised
cost basis of accounting is used in respect of that relationship,
(c)
condition A, B, C, D or E in section 357 is met in relation to the company
releasing the amount,
20
(d)
immediately before the time when the condition in question was first
met the relationship was a connected companies relationship, and
(e)
immediately after that time it was not such a relationship.
(2)
The company is not req uired to bring into account a credit in respect of the
release for the purposes of this Part.
25
360
Exclusion of credits on reversal of impairments of connected companies debts
(1)
If an impairment loss is prevented from being brought into account by section
354, no credit in respect of any reversal of the impairment may be brought into
account for the purposes of this Part.
(2)
Nothing in this section affects the credits to be brought into account for the
30
purposes of this Part in respect of exchange gains or losses arising from a debt.
Deemed debt releases on impaired debts becoming held by connected company
361
Acquisition of creditor rights by connected company at undervalue
(1)
This section applies if—
(a)
a company (“D”) is a party to a loan relationship as debtor,
35
(b)
another company (“C”) becomes a party to it as creditor,
(c)
immediately after it does so C and D are connected,
(d)
in a case where the person from whom C acquires its rights under the
loan relationship is a company, in the period of account in which C
acquires them there is no connection between C and that company,
40
(e)
the amount or value of any consideration given by C for the acquisition
is less than the pre-acquisition carrying value (see subsection (5)), and

Corporation Tax Bill
Part 5 — Loan Relationships
Chapter 6 — Connected companies relationships: impairment losses and releases of debts
165

(f)
at least one of the conditions in subsection (2) is met.
(2)
The conditions are that—
(a)
the acquisition is not an arm’s length transaction, and
(b)
there was a connection between C and D at any time in the period of 3
years beginning 4 years before the date of the acquisition.
5
(3)
C is treated as releasing its rights under the loan relationship when it acquires
them.
(4)
The amount treated as released is the amount of the difference referred to in
subsection (1)(e).
(5)
In subsection (1)(e) “the pre-acquisition carrying value” means the amount
10
which would be the carrying value of the liability under the loan relationship
in D’s accounts if a period of account had ended immediately before C became
a party to it.
(6)
For the purposes of subsection (5) the carrying value is determined taking no
account of—
15
(a)
accrued amounts, or
(b)
amounts paid or received in advance.
362
Parties becoming connected where creditor’s rights subject to impairment
adjustment
(1)
This section applies if—
20
(a)
a company (“D”) is a party to a loan relationship as debtor,
(b)
another company (“C”) which—
(i)
is a party to the loan relationship as creditor, and
(ii)
is not connected with D,

becomes connected with D, and
25
(c)
the pre-connection carrying value would have been adjusted for
impairment if a period of account had ended immediately before the
companies became connected.
(2)
C is treated as releasing its rights under the loan relationship when C and D
become connected.
30
(3)
The amount treated as released is the amount of the impairment adjustment
referred to in subsection (1)(c).
(4)
In subsection (1)(c) “the pre-connection carrying value” means the amount that
would be the carrying value of the asset representing the loan relationship in
C’s accounts if a period of account had ended immediately before the
35
companies became connected.
(5)
For the purposes of subsection (4) the carrying value is determined taking no
account of—
(a)
accrued amounts,
(b)
amounts paid or received in advance, or
40
(c)
impairment losses.