Corporation Tax Bill

House of Commons

Session 2008 - 09
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Corporation Tax Bill

Corporation Tax Bill
Part 5 — Loan Relationships
Chapter 15 — Tax avoidance
212

451
Exception to section 449 where loan exceeds arm’s length amount
(1)
Section 449 does not apply if the circumstances are such that, had the parties to
the relevant transaction been dealing at arm’s length, the amount of the loan
would have been an amount (“the arm’s length amount”) greater than nil, but
less than its actual amount.
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(2)
Accordingly, an exchange gain or loss which arises in the accounting period in
respect of an asset representing the creditor relationship is not required by that
section to be left out of account.
(3)
But if—
(a)
the circumstances are as mentioned in subsection (1), and
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(b)
there is no corresponding debtor relationship,

only a proportion of the exchange gain or loss may be taken into account in
determining the credits or debits to be brought into account for the purposes
of this Part.
(4)
That proportion is the proportion which the arm’s length amount bears to the
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actual amount of the loan.
(5)
In this section—
“corresponding debtor relationship” has the same meaning as in section
449 (see section 450), and
“the relevant transaction” means the transaction giving rise to the loan as
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a result of which the company has the creditor relationship in the
accounting period in question.
452
Exchange gains and losses where loan not on arm’s length terms
(1)
This subsection applies if—
(a)
a company would be treated as having a debtor relationship in an
25
accounting period if a claim were made under paragraph 6D(2) of
Schedule 28AA to ICTA in relation to that period, and
(b)
for that period there is a connection between that company and the
company that would have the corresponding creditor relationship.
(2)
If subsection (1) applies, it is assumed that such a claim is made for the purpose
30
of determining the debits or credits to be brought into account for the purposes
of this Part in respect of any exchange gains or losses arising in that period in
respect of the liability representing that debtor relationship.
(3)
Subsections (4) and (5) apply if—
(a)
because of a claim made under paragraph 6D(2) of Schedule 28AA to
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ICTA more than one company is treated for any purpose as having a
debtor relationship represented by the same liability, or
(b)
because of the claim that is assumed to be made under subsection (2)
more than one company is so treated.
(4)
The total amount of the credits brought into account for the purposes of this
40
Part in respect of exchange gains from those debtor relationships must not
exceed the total amount of the debits brought into account for those purposes
in respect of exchange losses from the corresponding creditor relationship.
(5)
The total amount of the debits brought into account for those purposes in
respect of exchange losses from those debtor relationships must not exceed the
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Corporation Tax Bill
Part 5 — Loan Relationships
Chapter 15 — Tax avoidance
213

total amount of the credits brought into account for those purposes in respect
of exchange gains from the corresponding creditor relationship.
(6)
Section 466 (companies connected for an accounting period) applies for the
purposes of this section.
Connected parties deriving benefit from creditor relationships
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453
Connected parties deriving benefit from creditor relationships
(1)
This section applies in the case of any loan relationship that is a creditor
relationship of a company (“A”) if—
(a)
the return to A from the relationship is less than a commercial return,
(b)
another company (“B”) that is connected with A directly or indirectly
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derives any benefit as a result of any arrangements made—
(i)
in consequence of the relationship, or
(ii)
otherwise in connection with the relationship, and
(c)
that benefit is designed to represent some or all of the amount by which
the return to A from the relationship is less than a commercial return.
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(2)
The credits to be brought into account by A in respect of the relationship for the
purposes of this Part are to be determined on the basis of fair value accounting.
(3)
The fair value of A’s rights under the relationship must include the fair value
of the benefit which is derived by B as a result of the arrangements.
(4)
In determining the return to A from the relationship for the purposes of
20
subsection (1)(a), any benefit which A derives directly or indirectly from the
benefit derived by B as mentioned in subsection (1)(b) is ignored.
(5)
In this section—
“arrangements” includes any agreement or understanding, whether or
not it is legally enforceable,
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“benefit” includes value in any form, and
“commercial return” means a return on an investment of money at a
commercial rate of interest.
Tax advantages from resetting interest rates ("reset bonds")
454
Application of fair value accounting: reset bonds etc
30
(1)
This section applies if—
(a)
a company has a creditor relationship,
(b)
the object, or one of the main objects, of the company entering into or
becoming a party to the relationship was the securing of a tax
advantage, and
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(c)
conditions A and B are met in relation to an asset representing the
relationship.
(2)
Condition A is that there is or has at any time been a change in—
(a)
the rate of interest payable in the case of the asset,
(b)
the amount payable to discharge the debt,
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(c)
the time at which any payments of interest under the asset fall due, or

Corporation Tax Bill
Part 5 — Loan Relationships
Chapter 16 — Non-trading deficits
214

(d)
the time at which any other payments under the asset fall due.
(3)
Condition B is that the difference between—
(a)
the fair value of the asset immediately after the change, and
(b)
the issue price of the asset,

is equal to at least 5% of the issue price of the asset.
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(4)
On and after the day on which conditions A and B become met in relation to an
asset the credits and debits to be brought into account for the purposes of this
Part as respects the loan relationship are to be determined using fair value
accounting.
(5)
In determining the fair value of an asset for any purpose of this section, it is
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assumed that all amounts payable by the debtor will be paid in full as they fall
due.
(6)
For the purposes of subsection (1)(b), it does not matter for whom the
advantage is secured.
Disposals for consideration not fully recognised by accounting practice
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455
Disposals for consideration not fully recognised by accounting practice
(1)
This section applies if in any accounting period (“the relevant accounting
period”) a company with the relevant avoidance intention disposes of rights
under a creditor relationship wholly or partly for consideration which—
(a)
is not wholly in the form of money or a debt which falls to be settled by
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the payment of money, and
(b)
is not fully recognised.
(2)
The relevant avoidance intention is the intention of eliminating or reducing the
credits to be brought into account for the purposes of this Part.
(3)
Consideration is not fully recognised if, as a result of the application of
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generally accepted accounting practice, the full amount or value of the
consideration is not recognised in determining the company’s profit or loss for
the relevant accounting period or any other accounting period.
(4)
In determining the credits which the company must bring into account for the
relevant accounting period for the purposes of this Part, it is assumed that the
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whole of the consideration is recognised in determining the company’s profit
or loss for that period.
(5)
But this section does not apply if paragraph 1(2) of Schedule 28AA to ICTA
(provision not at arm’s length) operates in relation to the disposal so as to
increase the tax liability of the company.
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Chapter 16
Non-trading deficits
456
Introduction to Chapter
(1)
This Chapter applies if for any accounting period a company has a non-trading
deficit from its loan relationships under section 301(6).
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Corporation Tax Bill
Part 5 — Loan Relationships
Chapter 16 — Non-trading deficits
215

(2)
In this Chapter “the deficit” and “the deficit period” mean that deficit and that
period respectively (but see section 458(5)).
(3)
Sections 457 and 458 set out the rules about carrying the deficit forward to later
accounting periods.
(4)
Sections 459 and 460 deal with claims for the deficit to be dealt with differently.
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(5)
Sections 461 to 463 deal with the consequences of such claims.
457
Basic rule for deficits: carry forward to accounting periods after deficit period
(1)
The basic rule is that the deficit must be carried forward and set off against
non-trading profits of the company for accounting periods after the deficit
period in accordance with subsection (3) and section 458.
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(2)
That rule does not apply to so much of the deficit as—
(a)
is surrendered as group relief under section 403 of ICTA, or
(b)
is the subject of a claim by the company under section 459 (claim to set
off deficit against profits of deficit period or earlier periods).
(3)
So much of the amount carried forward from the deficit period as is not the
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subject of a claim under section 458(1) must be set off against the non-trading
profits of the company for the next accounting period after the deficit period.
(4)
Those profits are reduced accordingly.
(5)
In this Chapter “non-trading profits”, in relation to a company, means so much
of the company’s profits as does not consist of trading income for the purposes
20
of section 393A of ICTA (setting-off of trading losses against profits of the same
or an earlier period).
458
Claim to carry forward deficit to later accounting periods
(1)
The company may make a claim for so much of the amount carried forward
from the deficit period as is specified in the claim to be excepted from being set
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off against non-trading profits of the first accounting period after the deficit
period (“the first later period”).
(2)
Any such claim must be made within the period of 2 years after the end of the
first later period.
(3)
Subsection (4) applies if any amount is carried forward from the deficit period
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under section 457(1) which—
(a)
cannot be set off under section 457(3) against non-trading profits of the
first later period, or
(b)
is the subject of a claim under subsection (1).
(4)
That amount is treated for the purposes of this Part as if it were—
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(a)
an amount of non-trading deficit from the company’s loan
relationships for the first later period, and
(b)
an amount which falls to be carried forward and set against non-
trading profits of later accounting periods under section 457(1).
(5)
Accordingly, section 457 and this section apply as if the first later period were
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the deficit period.