Corporation Tax Bill

House of Commons

Session 2008 - 09
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Other Bills before Parliament

Corporation Tax Bill

Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 2 — Contracts to which this Part applies
284

(5)
For the way in which credits and debits are to be brought into account where
subsection (4) applies, see section 603 (application of fair value accounting).
Exclusions from derivative contracts
589
Contracts excluded because of underlying subject matter: general
(1)
A relevant contract is not a derivative contract for the purposes of this Part if
5
its underlying subject matter—
(a)
consists wholly of excluded property (see subsections (2) to (5)), or
(b)
is treated as consisting wholly of such property.
(2)
“Excluded property” means—
(a)
intangible fixed assets,
10
(b)
shares in a company other than shares within subsection (3), or
(c)
rights of a unit holder under a unit trust scheme other than a scheme in
relation to which section 490 (holdings in OEICs, unit trusts and
offshore funds treated as creditor relationship rights) has effect.
(3)
The shares within this subsection are—
15
(a)
shares to which section 524 or 526 (shares subject to outstanding third
party obligations and shares which are non-qualifying shares) applies,
and
(b)
shares in an open-ended investment company in relation to which
section 490 has effect.
20
(4)
Subsection (2)(a) applies only in relation to a relevant contract which is an
option or future.
(5)
Subsection (2)(b) and (c) apply only in relation to a relevant contract which—
(a)
meets any of conditions A to E in section 591, and
(b)
is not designed to produce a return which equates in substance to the
25
return on an investment of money at a commercial rate of interest.
(6)
Section 590 applies for determining whether the underlying subject matter of a
relevant contract is to be treated as consisting wholly of excluded property.
590
Disregard of subordinate or small value underlying subject matter
(1)
This section applies in relation to a relevant contract if its underlying subject
30
matter consists only of—
(a)
excluded property, and
(b)
other underlying subject matter which is—
(i)
subordinate in relation to any of the excluded property, or
(ii)
of small value in comparison with the value of the underlying
35
subject matter as a whole.
(2)
The underlying subject matter of the contract is treated for the purposes of this
Part as if it consisted wholly of excluded property.
(3)
For the purposes of this section, whether part of the underlying subject matter
of a relevant contract of a company is subordinate or of small value is to be
40
determined by reference to the time when the company enters into or acquires
the contract.

Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 2 — Contracts to which this Part applies
285

(4)
In this section “excluded property” has the same meaning as in section 589.
591
Conditions A to E mentioned in section 589(5)
(1)
The following are the conditions mentioned in section 589(5).
(2)
Condition A is that the relevant contract—
(a)
is a plain vanilla contract entered into or acquired by a company
5
carrying on life assurance business,
(b)
is an approved derivative for the purposes of Rule 3.2.5 of the Insurance
Prudential Sourcebook, and
(c)
does not meet the condition in section 579(1)(b) (contract which is or
forms part of a financial asset or liability for accounting purposes).
10
(3)
Condition B is that—
(a)
the relevant contract is entered into or acquired by a company
otherwise than for the purposes of a trade carried on by it,
(b)
there is a hedging relationship between the contract and—
(i)
an asset of the company which consists of shares or rights of a
15
unit holder under a unit trust scheme, or
(ii)
any share capital of the company or any liability related to share
capital of the company, and
(c)
the relevant contract is not one to which the company is treated as a
party under section 585(2) (loan relationships with embedded
20
derivatives).
(4)
Condition C is that—
(a)
the relevant contract is entered into or acquired by a company
otherwise than for the purposes of a trade carried on by it, and
(b)
the relevant contract is an option which is listed on a recognised stock
25
exchange to subscribe for shares in a company.
(5)
Condition D is that—
(a)
the relevant contract is entered into or acquired by a company
otherwise than in the course of activities forming an integral part of a
trade carried on by it,
30
(b)
the relevant contract is—
(i)
an option to acquire shares in a company, or
(ii)
a future requiring delivery of shares in a company,
(c)
the relevant contract is not one to which the company is treated as a
party under section 585(2), and
35
(d)
the shares to be acquired or delivered—
(i)
constitute a substantial shareholding within the meaning of
paragraph 8 of Schedule 7AC to TCGA 1992 (meaning of
“substantial shareholding”), or
(ii)
would do so if acquired or delivered.
40
(6)
Condition E is that—
(a)
the company which is a party to the relevant contract has a hedging
relationship between—
(i)
the relevant contract, and

Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 2 — Contracts to which this Part applies
286

(ii)
an asset or liability representing a loan relationship which is
treated as mentioned in section 585(1) (loan relationships with
embedded derivatives), and
(b)
each relevant contract to which the company is treated as a party under
section 585(2) in the case of that loan relationship is a derivative
5
contract to which any of the provisions in subsection (7) applies.
(7)
The provisions mentioned in subsection (6)(b) are—
(a)
section 645 (creditor relationships: embedded derivatives which are
options),
(b)
section 648 (creditor relationships: embedded derivatives which are
10
exactly tracking contracts for differences),
(c)
sections 653 to 655 (issuers of securities with embedded derivatives:
deemed options), and
(d)
section 658 (issuers of securities with embedded derivatives: deemed
contracts for differences).
15
(8)
For the cases in which sections 653 to 655 and section 658 apply, see sections
652 and 656 respectively.
592
Embedded derivatives treated as meeting condition in section 591 etc
(1)
This section applies if for an accounting period—
(a)
a company is a party to a hybrid derivative which meets the condition
20
in section 579(1)(b) (contract which is or forms part of a financial asset
or liability for accounting purposes),
(b)
the embedded derivative is a relevant contract which meets the
condition in section 579(1)(a) (contract treated for accounting purposes
as derivative),
25
(c)
the underlying subject matter of that contract consists, or is treated as
consisting, wholly of—
(i)
shares in a company, or
(ii)
rights of a unit holder under a unit trust scheme, and
(d)
the host contract is or forms part of a financial asset or liability for
30
accounting purposes.
(2)
The embedded derivative is treated—
(a)
for the purposes of section 589 (contracts excluded because of
underlying subject matter: general) as meeting one of the conditions in
section 591, and
35
(b)
as a chargeable asset.
(3)
The host contract is treated for the purposes of the Corporation Tax Acts as if
it were a creditor relationship of the company (see Part 5 (loan relationships)).
(4)
Section 590 (disregard of subordinate or small value underlying subject matter)
applies for the purpose of determining whether the underlying subject matter
40
is to be treated as consisting wholly of property mentioned in subsection (1)(c)
as that section so applies in relation to excluded property.
(5)
In this section—
“the embedded derivative” means the relevant contract to which the
company is treated as a party under section 584(2)(a) because of the
45
hybrid derivative mentioned in subsection (1)(a), and

Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 3 — Credits and debits to be brought into account: general
287

“the host contract” means the relevant contract to which the company is
treated as a party under section 584(2)(b) because of that hybrid
derivative.
593
Contracts where part of underlying subject matter is excluded property
(1)
This section applies to a relevant contract of a company—
5
(a)
which is an option or future,
(b)
which meets any of the accounting conditions in section 579(1), and
(c)
whose underlying subject matter consists of—
(i)
excluded property, and
(ii)
other underlying subject matter.
10
(2)
A relevant contract to which this section applies is treated for the purposes of
the Corporation Tax Acts as if it were the following two contracts—
(a)
a relevant contract whose underlying subject matter consists of the
excluded property, and
(b)
a relevant contract whose underlying subject matter consists of the
15
other underlying subject matter.
(3)
For the purposes of giving effect to subsection (2), all such apportionments as
are just and reasonable are to be made.
(4)
This section does not apply to a relevant contract if it is determined in
accordance with section 590 (disregard of subordinate or small value
20
underlying subject matter) that the underlying subject matter of the relevant
contract is to be treated as consisting wholly of excluded property.
(5)
In this section “excluded property” has the same meaning as in section 589
(contracts excluded because of underlying subject matter: general).
Chapter 3
25
Credits and debits to be brought into account: general
Introduction
594
Overview of Chapter
(1)
This Chapter contains rules of general application about the credits and debits
to be brought into account for the purposes of this Part.
30
(2)
In particular, it—
(a)
sets out the general principles which are to apply in relation to the
bringing into account of credits and debits, including the use of
generally accepted accounting practice and the taking into account of
related transactions (see sections 595 and 596),
35
(b)
makes provision about the interpretation of the expression “amounts
recognised in determining a company’s profit or loss” (see sections 597
to 599),
(c)
makes provision in relation to the application of fair value accounting
(see sections 600 to 603),
40
(d)
sets out some general rules which differ from generally accepted
accounting practice (see sections 604 and 605),

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Part 7 — Derivative contracts
Chapter 3 — Credits and debits to be brought into account: general
288

(e)
makes provision about exchange gains and losses (see section 606),
(f)
makes provision about pre-contract or abortive expenses (see section
607),
(g)
makes provision about companies ceasing to be parties to derivative
contracts and companies moving abroad (see sections 608 to 610), and
5
(h)
makes provision in relation to statutory insolvency arrangements (see
section 611).
General principles
595
General principles about the bringing into account of credits and debits
(1)
This Part operates by reference to the accounts of companies and amounts
10
recognised for accounting purposes in those accounts.
(2)
The general rule is that the amounts to be brought into account by a company
as credits or debits for any period for the purposes of this Part are those which
are recognised in determining the company’s profit or loss for the period in
accordance with generally accepted accounting practice (but this is subject to
15
subsections (3) and (4)).
(3)
The credits and debits to be brought into account in respect of a company’s
derivative contracts are the amounts which, when taken together, fairly
represent for the accounting period in question—
(a)
all profits and losses of the company which arise to it from its derivative
20
contracts and related transactions (excluding expenses), and
(b)
all expenses incurred by the company under or for the purposes of
those contracts and transactions.
(4)
Expenses are only treated as incurred as mentioned in subsection (3)(b) if they
are incurred directly—
25
(a)
in bringing any of the derivative contracts into existence,
(b)
in entering into or giving effect to any of the related transactions,
(c)
in making payments under any of those contracts or as a result of any
of those transactions, or
(d)
in taking steps to ensure the receipt of payments under any of those
30
contracts or in accordance with any of those transactions.
(5)
For the treatment of pre-contract or abortive expenses, see section 607.
(6)
In subsection (3) “profits and losses” includes profits and losses of a capital
nature.
(7)
This section is subject to the following provisions of this Part.
35
(8)
For the meaning of “related transaction” see section 596.
596
Meaning of “related transaction”
(1)
In this Part “related transaction”, in relation to a derivative contract, means any
disposal or acquisition (in whole or in part) of rights or liabilities under the
contract.
40
(2)
For this purpose the cases where there is taken to be such a disposal or
acquisition include—

Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 3 — Credits and debits to be brought into account: general
289

(a)
those where rights or liabilities under the derivative contract are
transferred or extinguished by any sale, gift, surrender or release, and
(b)
those where the contract is discharged by performance in accordance
with its terms.
Amounts recognised in determining a company’s profit or loss
5
597
Amounts recognised in determining a company’s profit or loss
(1)
References in this Part to an amount recognised in determining a company’s
profit or loss for a period are to an amount recognised in—
(a)
the company’s profit and loss account, income statement or statement
of comprehensive income for that period,
10
(b)
the company’s statement of total recognised gains and losses,
statement of recognised income and expense, statement of changes in
equity or statement of income and retained earnings for that period, or
(c)
any other statement of items recognised in calculating the company’s
profits and losses for that period.
15
(2)
If, in accordance with generally accepted accounting practice, an amount is
shown as a prior period adjustment in any statement within subsection (1), it
must be brought into account for the purposes of this Part in calculating the
company’s profits and losses for the period to which the statement relates.
(3)
Subsection (2) does not apply to an amount recognised for accounting
20
purposes by way of correction of a fundamental error.
598
Regulations about recognised amounts
(1)
The Treasury may by regulations make provision—
(a)
excluding amounts of a specified description from section 597(1)
(amounts recognised in determining a company’s profit or loss),
25
(b)
requiring amounts of a specified description which are not within
section 597(1) to be brought into account in determining a company’s
profit or loss for a period in specified circumstances, and
(c)
as to the way in which any such amounts are to be brought into
account.
30
(2)
For the purposes of subsection (1)(b), it does not matter whether the amounts
are not within section 597(1) because of regulations under subsection (1)(a) or
otherwise.
(3)
The regulations may (in particular) make provision by reference to the fact that
amounts derive from or otherwise relate to amounts brought into account in a
35
specified way in a previous period of account.
(4)
The regulations may—
(a)
make different provision for different cases, and
(b)
make provision subject to an election or to other specified conditions.
(5)
The regulations may apply, exclude or modify any of the provisions of this Part
40
in relation to cases for which provision is made by the regulations.

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Part 7 — Derivative contracts
Chapter 3 — Credits and debits to be brought into account: general
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(6)
The regulations may apply to periods of account beginning before they are
made, but not earlier than the beginning of the calendar year in which they are
made.
599
Meaning of “amounts recognised for accounting purposes”
(1)
If a company—
5
(a)
draws up accounts which are not GAAP-compliant accounts, or
(b)
does not draw up accounts at all,

this Part applies as if GAAP-compliant accounts had been drawn up.
(2)
Accordingly, references in this Part to amounts recognised for accounting
purposes include references to the amounts which would have been
10
recognised if GAAP-compliant accounts had been drawn up for the period of
account in question and any relevant earlier period.
(3)
For this purpose a period of account is relevant to a later period if the accounts
for the later period rely to any extent on amounts derived from the earlier
period.
15
(4)
In this section “GAAP-compliant accounts” means accounts drawn up in
accordance with generally accepted accounting practice.
Application of fair value accounting
600
Contract which is or forms part of financial asset or liability
(1)
This section applies to a derivative contract which meets the condition in
20
section 579(1)(b) (contract which is or forms part of a financial asset or liability
for accounting purposes).
(2)
The amounts to be brought into account in accordance with this Part in respect
of the contract are to be determined on the basis of fair value accounting.
601
Contract relating to holding in OEIC, unit trust or offshore fund
25
(1)
This section applies if a company is a party in an accounting period to a
relevant contract which is treated as a derivative contract under section 587
(contract relating to holding in OEIC, unit trust or offshore fund).
(2)
The credits and debits which are to be brought into account in accordance with
this Part in respect of the relevant contract are to be determined on the basis of
30
fair value accounting.
602
Contract becoming one relating to holding in OEIC, unit trust or offshore
fund
(1)
This section applies if—
(a)
a company is a party to a relevant contract in two successive accounting
35
periods,
(b)
section 587 (contract relating to holding in OEIC, unit trust or offshore
fund) applies in relation to the relevant contract for the second
accounting period but not the first accounting period, and
(c)
immediately before the beginning of the second accounting period the
40
relevant contract was a chargeable asset.