Corporation Tax Bill

House of Commons

Session 2008 - 09
Internet Publications
Other Bills before Parliament

Corporation Tax Bill

Corporation Tax Bill
Part 5 — Loan Relationships
Chapter 12 — Special rules for particular kinds of securities
187

(a)
any amount relating to changes in the value of a FOTRA security, or
(b)
any debit in respect of the loan relationship represented by the security,
including any expenses related to holding the security or any
transaction concerning it.
(2)
Condition A is that the company is the beneficial owner of the security.
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(3)
Condition B is that the company is a company which would be exempt from
corporation tax on the security under section 1279 (exemption of profits from
FOTRA securities).
(4)
In this section “FOTRA security” has the same meaning as in that section (see
section 1280(1)).
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405
Certain non-UK residents with interest on 3½% War Loan 1952 Or After
(1)
This section applies if—
(a)
in any accounting period a non-UK resident company carries on a
business in the United Kingdom—
(i)
consisting of banking or insurance, or
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(ii)
consisting wholly or partly of dealing in securities, and
(b)
in calculating the profits of the business for the period any amount is
disregarded as a result of section 1279 (exemption of profits from
FOTRA securities) because of a condition subject to which any 3½%
War Loan 1952 Or After was issued.
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(2)
Interest on money borrowed for the purposes of the business is to be brought
into account as a debit for the purposes of this Part for that period only so far
as it exceeds the ineligible amount.
(3)
The ineligible amount is found as follows—
Step 1
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Add together all sums borrowed for the purposes of the business and still
owing in the accounting period.
Step 2

Deduct any sums carrying interest that is not brought into account as a debit
under this Part (otherwise than because of subsection (2)).
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Step 3

If the amount found at Step 2 exceeds the total cost of the 3½% War Loan 1952
Or After held for the purposes of the business in the accounting period, deduct
the excess from that amount.
Step 4
35

Calculate the average rate of interest in the accounting period on money
borrowed for the purposes of the business.
Step 5

Calculate the amount of interest payable on the amount found at Step 3 at the
rate found at Step 4 for the accounting period.
40

The result is the ineligible amount.

Corporation Tax Bill
Part 5 — Loan Relationships
Chapter 12 — Special rules for particular kinds of securities
188

(4)
If the company’s holding of 3½% War Loan 1952 Or After has fluctuated
during the accounting period, the total cost for the purposes of Step 3 is taken
to be—

where—
C is the cost of acquisition of the initial holding (if any) and any holdings
5
acquired during the accounting period,
AH is the average holding in that period, and
TH is the total of the initial holding (if any) and any holdings acquired
during the accounting period.
(5)
In subsection (4) “initial holding” means the holding held by the company at
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the beginning of the accounting period.
Deeply discounted securities: connected companies and close companies
406
Introduction
(1)
The following sections deal with deeply discounted securities—
(a)
sections 407 and 408 (deeply discounted securities where companies
15
have a connection),
(b)
sections 409 to 411 (deeply discounted securities of close companies),
and
(c)
section 412 (persons indirectly standing in the position of creditor).
(2)
In this section and sections 407 to 412 “deeply discounted security” has the
20
same meaning as in Chapter 8 of Part 4 of ITTOIA 2005 (profits from deeply
discounted securities) (see section 430 of that Act).
(3)
In sections 407 to 412 “the discount” means the difference between—
(a)
the issue price of the security, and
(b)
the amount payable on redemption.
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(4)
The provisions of Chapter 8 of Part 4 of ITTOIA 2005 apply for the purposes of
this section and sections 407 to 412 for determining the difference between the
issue price of a security and the amount payable on redemption as they apply
for the purposes of section 430 of that Act.
407
Postponement until redemption of debits for connected companies’ deeply
30
discounted securities
(1)
This section applies as respects any accounting period (“the relevant period”)
if—
(a)
a debtor relationship of a company (“the issuing company”) is
represented by a deeply discounted security issued by it,
35
(b)
at any time in the relevant period another company stands in the
position of a creditor as respects the security,
(c)
there is a connection between those companies for the relevant period,

Corporation Tax Bill
Part 5 — Loan Relationships
Chapter 12 — Special rules for particular kinds of securities
189

(d)
the period is not the accounting period in which the security is
redeemed, and
(e)
credits representing the full amount of the discount which is referable
to the relevant period are not brought into account for the purposes of
this Part in respect of the corresponding creditor relationship for any
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accounting period (see section 412(2)).
(2)
The debits to be brought into account for the purposes of this Part in respect of
the loan relationship by the issuing company are to be adjusted so that any
debit relating to the amount of the discount which is referable to the relevant
period—
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(a)
is not brought into account for the relevant period, but
(b)
is brought into account for the accounting period in which the security
is redeemed.
(3)
The amount of the discount which is referable to the relevant period is the
amount of it which would be brought into account for that period apart from
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this section.
(4)
For the meaning of “standing in the position of a creditor” and the meaning of
“corresponding creditor relationship” where a company indirectly stands in
that position, see section 412.
(5)
Whether there is a connection between companies for the purposes of this
20
section is determined in accordance with section 408.
408
Companies connected for section 407
(1)
For the purposes of section 407 there is a connection between two companies
for an accounting period if condition A or B is met.
(2)
Condition A is that there is a time in the period when one of the companies has
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control of, or a major interest in, the other.
(3)
Condition B is that there is a time in the period when both companies are under
the control of the same person.
(4)
Section 472 (meaning of “control”) applies for the purposes of this section.
(5)
For the meaning of “major interest”, see section 473.
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409
Postponement until redemption of debits for close companies’ deeply
discounted securities
(1)
This section applies for any accounting period (“the relevant period”) if—
(a)
a debtor relationship of a close company (“the issuing company”) is
represented by a deeply discounted security it has issued,
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(b)
at any time in the period there is a person who stands in the position of
a creditor as respects the security and is—
(i)
a participator in the issuing company,
(ii)
an associate of such a participator,
(iii)
a company of which such a participator has control,
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(iv)
a person who controls a company which is such a participator,
(v)
an associate of a person within sub-paragraph (iv), or
(vi)
a company controlled by a person within sub-paragraph (iv),

Corporation Tax Bill
Part 5 — Loan Relationships
Chapter 12 — Special rules for particular kinds of securities
190

(c)
the period is not the accounting period in which the security is
redeemed, and
(d)
this section is not disapplied by section 410.
(2)
The debits which are to be brought into account for the purposes of this Part by
the issuing company in respect of the loan relationship are to be adjusted so
5
that debits relating to the amount of the discount that is referable to the
relevant period (“relevant debits”)—
(a)
are not brought into account for the relevant period, but
(b)
are brought into account for the accounting period in which the
security is redeemed.
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(3)
If there is a person within subsection (1)(b) for only part of the relevant period,
subsection (2) applies only to the appropriate proportion of the relevant debits.
(4)
In subsection (3) “the appropriate proportion” means the proportion that the
part of the relevant period for which there is such a person bears to the whole
of that period.
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(5)
The amount of the discount that is referable to the relevant period is the
amount of it which would be brought into account for the purposes of this Part
for the relevant period in the case of the issuing company, apart from
subsections (2) and (3).
(6)
For the meaning of other expressions used in this section, see—
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(a)
section 411 (interpretation of this section), and
(b)
section 412 (persons indirectly standing in the position of creditor).
410
Exceptions to section 409
(1)
Section 409 does not apply for any accounting period (“the relevant period”) if
any of the following conditions are met—
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(a)
the corresponding creditor relationship conditions (see subsection (2)),
(b)
the CIS-based close company conditions (see subsection (3)), or
(c)
the CIS limited partnership conditions (see subsection (4)).
(2)
The corresponding creditor relationship conditions are that—
(a)
at all times in the relevant period when there is a person within section
30
409(1)(b), that person is a company, and
(b)
credits representing the full amount of the discount that is referable to
the period are brought into account for the purposes of this Part for any
accounting period in respect of the corresponding creditor relationship
(see section 412(3)).
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(3)
The CIS-based close company conditions are that—
(a)
the issuing company is a CIS-based close company,
(b)
at no time in the relevant period when there is a person within section
409(1)(b) is that person resident in a non-qualifying territory, and
(c)
the issuing company is a small or medium-sized enterprise for the
40
relevant period.
(4)
The CIS limited partnership conditions are that—
(a)
the debt is one which is owed to, or to persons acting for, a CIS limited
partnership,

Corporation Tax Bill
Part 5 — Loan Relationships
Chapter 12 — Special rules for particular kinds of securities
191

(b)
no member of that partnership is resident in a non-qualifying territory
at any time in the relevant period when there is a person within section
409(1)(b),
(c)
the issuing company has received written notice from the partnership
containing information from which it appears that the condition in
5
paragraph (b) is met, and
(d)
the issuing company is a small or medium-sized enterprise for the
relevant period.
(5)
In this section—
“CIS-based close company” means a company that would not be a close
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company apart from the rights and powers of one or more partners in
a CIS limited partnership being attributed to another of the partners
under section 416(6) of ICTA because of section 417(3)(a) of that Act,
“CIS limited partnership” means a limited partnership—
(a)
which is a collective investment scheme, or
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(b)
which would be a collective investment scheme if it were not a
body corporate,
“issuing company” has the same meaning as in section 409 (see subsection
(1)(a) of that section),
“non-qualifying territory” has the meaning given by paragraph 5E of
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Schedule 28AA to ICTA (provision not at arm’s length),
“resident” has the meaning given by paragraph 5B(6) of that Schedule,
and
“small or medium-sized enterprise” has the meaning given by paragraph
5D of that Schedule.
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(6)
For the meaning of “corresponding creditor relationship”, see section 412
(persons indirectly standing in the position of creditor).
411
Interpretation of section 409
(1)
Section 472 (meaning of “control”) applies for the purposes of section 409 and
this section.
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(2)
A person who is a participator in a company which controls another company
is treated for the purposes of section 409 as being a participator in that other
company also.
(3)
Subject to that, in section 409 and this section “participator”, in relation to a
company, means a person who is a participator in the company for the
35
purposes of Part 11 of ICTA because of section 417 of that Act, but not a person
who is a participator for those purposes just because of being a loan creditor of
the company.
(4)
In determining whether a person who carries on the trade of banking is a
participator in a company for the purposes of section 409 and this section,
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securities of the company acquired by the person in the ordinary course of the
person’s business are ignored.
412
Persons indirectly standing in the position of creditor
(1)
For the purposes of sections 407(1)(b) and 409 a person is treated as standing in
the position of a creditor if the person indirectly stands in that position by
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reference to a series of loan relationships or relevant money debts.

Corporation Tax Bill
Part 5 — Loan Relationships
Chapter 12 — Special rules for particular kinds of securities
192

(2)
If a company (“C”) is so treated for the purposes of section 407(1)(b), the
reference in section 407(1)(e) to the corresponding creditor relationship is a
reference to C’s creditor relationship.
(3)
If a person (“P”) is so treated for the purposes of section 409, the reference in
section 410(2)(b) to the corresponding creditor relationship is a reference to P’s
5
creditor relationship.
(4)
In subsection (1) “relevant money debt” means a money debt which would be
a loan relationship if a company directly stood in the position of creditor or
debtor.
Funding bonds
10
413
Issue of funding bonds
(1)
This section applies to the issue of funding bonds to a creditor in respect of a
liability to pay interest on a debt incurred by a body corporate, a government,
a public institution or other public authority.
(2)
The issue is treated for the purposes of the Corporation Tax Acts as if it were
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the payment of so much of that interest as equals the market value of the bonds
at their issue.
(3)
In this section “funding bonds” includes any bonds, stocks, shares, securities or
certificates of indebtedness.
414
Redemption of funding bonds
20
(1)
The redemption of funding bonds is not treated as the payment of interest on
a debt for the purposes of the Corporation Tax Acts if their issue was treated as
the payment of interest on the debt under—
(a)
section 413, or
(b)
section 380 of ITTOIA 2005 (which makes provision corresponding to
25
section 413 for income tax purposes).
(2)
In this section “funding bonds” includes any bonds, stocks, shares, securities or
certificates of indebtedness.
Derivatives
415
Loan relationships with embedded derivatives
30
(1)
This section applies if in accordance with generally accepted accounting
practice a company treats the rights and liabilities under a loan relationship to
which it is a party as divided between—
(a)
rights and liabilities under a loan relationship (“the host contract”), and
(b)
rights and liabilities under one or more derivative financial
35
instruments or equity instruments.
(2)
The company is treated for the purposes of this Part as a party to a loan
relationship whose rights and liabilities consist only of those of the host
contract.

Corporation Tax Bill
Part 5 — Loan Relationships
Chapter 12 — Special rules for particular kinds of securities
193

(3)
For the corresponding treatment of the rights and liabilities within subsection
(1)(b), see section 585 (loan relationships with embedded derivatives).
416
Election for application of sections 415 and 585
(1)
This section applies if—
(a)
a company is subject to old UK GAAP for a period of account,
5
(b)
at the beginning of its first relevant period of account the company did
not hold any assets (“relevant assets”) which it is not permitted under
old UK GAAP to treat as mentioned in section 415(1),
(c)
the company subsequently acquires one or more relevant assets (to
which sections 415 and 585 do not apply because of the company being
10
subject to old UK GAAP), and
(d)
the company would have been permitted to treat the relevant assets as
mentioned in section 415(1) if it had been subject to—
(i)
international accounting standards, or
(ii)
new UK GAAP.
15
(2)
The company may elect that this Part and Part 7 (derivative contracts) should
apply as if sections 415 and 585 did apply.
(3)
The election has effect in relation to all relevant assets held by the company
including those subsequently acquired, except as provided in subsection (4).
(4)
An election made on or after 12 March 2008 does not have effect in relation to
20
any relevant assets in the case of which section 418 (loan relationships treated
differently by connected debtor and creditor) applies.
(5)
If an election is made under this section, sections 315 to 318 (adjustments on
change of accounting policy) apply as if there were a change of accounting
policy consisting of the company treating its relevant assets as mentioned in
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section 415(1) as from the date the election has effect.
(6)
See also section 613(4) (which makes provision corresponding to subsection (5)
for the purposes of Part 7).
(7)
In this section—
“first relevant period of account”, in relation to a company, means the first
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period of account of the company beginning on or after 1 January 2005
(the first period in relation to which section 94A of FA 1996 (which is
rewritten in section 415) had effect),
“old UK GAAP” means UK generally accepted accounting practice as it
applied for periods of account beginning before 1 January 2005, and
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“new UK GAAP” means UK generally accepted accounting practice as it
applies for periods of account beginning on or after that date.
(8)
Section 417 makes further provision about elections under this section.
417
Further provisions about elections under section 416
(1)
An election under section 416 must be made not later than 90 days after the
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acquisition of the relevant assets or, if there is more than one acquisition, the
first of them.
(2)
The election is irrevocable.