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 5 — Continuity of treatment on transfers within groups
303

(c)
both confers such rights and imposes such liabilities.
(2)
Rights or liabilities are within this subsection if they are equivalent to those of
B under a derivative contract to which B has previously ceased to be a party.
Exceptions to section 625
628
Transferor using fair value accounting
5
(1)
This section applies instead of section 625 if, in a case where that section would
otherwise apply, the transferor uses fair value accounting as respects the
derivative contract.
(2)
The amount which is to be brought into account by the transferor in respect
of—
10
(a)
the transaction mentioned in that section, or
(b)
the series of transactions mentioned in that section taken together,

is the fair value of the derivative contract as at the date of transfer to the
transferee.
(3)
For any accounting period in which the transferee is a party to the contract, for
15
the purpose of determining the credits and debits to be brought into account in
respect of the contract in accordance with this Part, the transferee is treated as
if it had acquired the contract for consideration of an amount equal to the fair
value of the contract as at the date of transfer to it.
(4)
If a discount arises in respect of the transaction or series of transactions, the
20
amount to be brought into account under subsection (2) is increased by the
amount of the discount.
(5)
In this section—
“discount” has the same meaning as in section 480 (relevant non-lending
relationships involving discounts), and
25
“the transferor” and “the transferee” have the same meaning as in section
625.
629
         Tax avoidance
(1)
Section 625 does not apply if conditions A and B are met.
(2)
Condition A is that the transferor is a party to arrangements in accordance with
30
which there is likely to be a transfer of rights or liabilities under the derivative
contract by the transferee to another person in circumstances in which section
625 would not apply.
(3)
Condition B is that the purpose or one of the main purposes of the
arrangements is to secure a tax advantage for the transferor or a person
35
connected with it.
(4)
Section 625 does not apply in relation to a disposal if section 698 (disposals for
consideration not fully recognised by accounting practice) applies in relation
to the disposal.
(5)
In this section—
40
“arrangements” includes any scheme, agreement, understanding,
transaction or series of transactions,

Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 5 — Continuity of treatment on transfers within groups
304

“tax advantage” has the meaning given by section 840ZA of ICTA,
“transfer” includes any arrangement which equates in substance to a
transfer (including any acquisition or disposal of, or increase or
decrease in, a share of the profits or assets of a firm), and
“the transferor” and “the transferee” have the same meaning as in section
5
625.
Transferee leaving group after replacing transferor as party to derivative contract
630
Introduction to sections 631 and 632
(1)
Sections 631 and 632 apply if—
(a)
section 625 (group member replacing another as party to derivative
10
contract) applies because of a transaction or series of transactions
within section 626(2) or (3), and
(b)
before the end of the relevant 6 year period and while still a party to the
relevant derivative contract, the transferee ceases to be a member of the
relevant group.
15
(2)
But the transferee is not to be treated for the purposes of this section and
sections 631 and 632 as having left the relevant group if—
(a)
rights and liabilities under a derivative contract are transferred in the
course of a transfer or merger in relation to which Chapter 9 (European
cross-border transfers of business) or Chapter 10 (European cross-
20
border mergers) applies, and
(b)
the transferee ceases to be a member of the relevant group in
consequence of the transfer or merger.
(3)
In a case where subsection (2) applies, if the transferee becomes a member of
another group in consequence of the transfer or merger, it is to be treated for
25
the purposes of this section and sections 631 and 632 as if the relevant group
and the other group were the same.
(4)
In this section and sections 631 and 632—
“the relevant 6 year period” means the period of 6 years following—
(a)
in a case where section 625 applies because of a transaction
30
within section 626(2) (“case A”), that transaction, or
(b)
in a case where section 625 applies because of a series of
transactions within section 626(3) (“case B”), the last transaction
of that series,
“the relevant derivative contract” means the derivative contract
35
mentioned in section 625(1),
“the relevant group” means—
(a)
in case A, the group mentioned in section 626(2),
(b)
in case B, the group mentioned in section 626(3), and
“the transferee” has the same meaning as in section 625.
40
631
Transferee leaving group otherwise than because of exempt distribution
(1)
This section applies if—
(a)
the transferee ceases to be a member of the relevant group, and
(b)
it does not so cease just because of a distribution which is exempt as a
result of—
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Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 5 — Continuity of treatment on transfers within groups
305

(i)
section 213(2) of ICTA (exempt distributions), or
(ii)
section 213A of ICTA (exempt distributions: division of
business).
(2)
If condition A or B is met, this Part applies as if—
(a)
the transferee had assigned its rights and liabilities under the relevant
5
derivative contract immediately before so ceasing,
(b)
the assignment had been for consideration of an amount equal to their
fair value at that time, and
(c)
the transferee had immediately reacquired them for consideration of
the same amount.
10
(3)
Condition A is that if subsection (2) applied a credit would be brought into
account in accordance with this Part by the transferee because of subsection
(2)(a) and (b).
(4)
Condition B is that—
(a)
the transferee has a hedging relationship between the relevant
15
derivative contract and a creditor relationship, and
(b)
because of section 345(2)(a) and (b) (transferee leaving group otherwise
than because of exempt distribution) a credit is to be brought into
account by the transferee for the purposes of Part 5 (loan relationships)
in respect of the creditor relationship.
20
632
Transferee leaving group because of exempt distribution
(1)
This section applies if—
(a)
the transferee ceases to be a member of the relevant group just because
of a distribution which is exempt as a result of—
(i)
section 213(2) of ICTA (exempt distributions), or
25
(ii)
section 213A of ICTA (exempt distributions: division of
business), and
(b)
there is a chargeable payment within the meaning of section 214(2) of
that Act (chargeable payments connected with exempt distributions)
within 5 years after the making of the distribution.
30
(2)
If condition A or B is met, this Part applies as if—
(a)
the transferee had assigned its rights and liabilities under the relevant
derivative contract immediately before that chargeable payment was
made,
(b)
the assignment had been for consideration of an amount equal to their
35
fair value immediately before the transferee ceased to be a member of
the relevant group, and
(c)
the transferee had immediately reacquired them for consideration of
the same amount.
(3)
Condition A is that if subsection (2) applied a credit would be brought into
40
account in accordance with this Part by the transferee because of subsection
(2)(a) and (b).
(4)
Condition B is that—
(a)
the transferee has a hedging relationship between the relevant
derivative contract and a creditor relationship, and
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Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 6 — Special kinds of company
306

(b)
because of section 346(2)(a) and (b) (transferee leaving group because
of exempt distribution) a credit is to be brought into account by the
transferee for the purposes of Part 5 (loan relationships) in respect of
the creditor relationship.
Chapter 6
5
Special kinds of company
Mutual trading companies
633
Mutual trading companies
For the purposes of this Part, activities carried on by a company in the course
of any mutual trading are treated as not constituting the whole or any part of
10
a trade.
Insurance companies
634
Insurance companies
For the purposes of this Part, activities carried on by a company in the course
of—
15
(a)
any mutual insurance or other mutual business which is not life
assurance business, or
(b)
any basic life assurance and general annuity business,
are treated as not constituting the whole or any part of a trade.
635
Creditor relationships: embedded derivatives which are options
20
(1)
This section applies if in any accounting period—
(a)
a company is a party to a creditor relationship for the purposes of its life
assurance business, and
(b)
that creditor relationship is one in relation to which sections 415 and
585 (which both apply to loan relationships with embedded
25
derivatives) would have effect but for the fact that the company
accounts for the creditor relationship at fair value through profit and
loss.
(2)
This Part and Part 5 (loan relationships) have effect for that accounting period
as they would if the creditor relationship were one in relation to which those
30
sections have effect.
636
Modifications of Chapter 5
(1)
Chapter 5 (continuity of treatment on transfers within groups) has effect in
relation to insurance companies with the following modifications.
(2)
Section 625(1)(a) (which sets out one of the conditions for that section to apply)
35
has effect as if for “section 626(2)” there were substituted “section 626(2), (2A)
or (2B)”.
(3)
Section 626 (transactions to which section 625 applies) has effect as if after

Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 6 — Special kinds of company
307

subsection (2) there were inserted—
“(2A)
A transaction is within this subsection if it is a transfer between two
companies of business consisting of the effecting or carrying out of
contracts of long-term insurance which has effect under an insurance
business transfer scheme.
5
(2B)
A transaction is within this subsection if it is a transfer between two
companies which is a qualifying overseas transfer.”
(4)
Section 625 (group member replacing another as party to derivative contract)
does not apply as a result of a transaction or series of transactions within
section 626(2) or (3) in relation to a transfer of an asset, or of rights or duties
10
under or an interest in an asset, if the asset was within one of the categories set
out in section 440(4)(a), (d) and (e) of ICTA (assets held for certain categories of
long-term business)—
(a)
immediately before the transfer, or
(b)
immediately after it.
15
(5)
Section 625 does not apply as a result of a transaction within section 626(2A) or
(2B) in relation to a transfer of an asset, or of rights or duties under or an
interest in an asset, if the asset—
(a)
was within one of the categories set out in section 440(4) of ICTA
(transfer of assets etc) immediately before the transfer, and
20
(b)
is not within that category immediately after it.
(6)
Subsection (7) applies for the purposes of subsection (5) if one of the companies
is an overseas life insurance company.
(7)
An asset is taken to be within the same category both immediately before the
transfer and immediately after it if the asset—
25
(a)
was within one category immediately before the transfer, and
(b)
is within the corresponding category immediately after it.
Investment and venture capital trusts
637
Investment trusts: profits or losses of a capital nature
(1)
Profits or losses of a capital nature arising to an investment trust from a
30
derivative contract may not be brought into account as credits or debits in
accordance with this Part.
(2)
For the purposes of this section, “profits or losses of a capital nature” means
profits or losses which—
(a)
are accounted for through the capital column of the income statement
35
in accordance with the Statement of Recommended Practice, or
(b)
would have been so accounted for if that Statement had been applied
correctly.
(3)
“The Statement of Recommended Practice”, in relation to an accounting period
for which it is required or permitted to be used, means—
40
(a)
the Statement of Recommended Practice relating to Investment Trust
Companies, issued by the Association of Investment Trust Companies
in January 2003, as from time to time modified, amended or revised, or

Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 7 — Chargeable gains arising in relation to derivative contracts
308

(b)
any subsequent Statement of Recommended Practice relating to
investment trusts, as from time to time modified, amended or revised.
(4)
The Treasury may by order amend the definition of “profits or losses of a
capital nature” in subsection (2), so far as it applies in relation to an investment
trust which prepares accounts in accordance with international accounting
5
standards.
638
Venture capital trusts: profits or losses of a capital nature
(1)
Profits or losses of a capital nature arising to a venture capital trust from a
derivative contract may not be brought into account as credits or debits in
accordance with this Part.
10
(2)
For the purposes of this section, “profits or losses of a capital nature” means
profits or losses which—
(a)
are accounted for through the capital column of the income statement
in accordance with the Statement of Recommended Practice, or
(b)
would have been so accounted for if the venture capital trust had been
15
an investment trust and that Statement had been applied correctly.
(3)
In this section “the Statement of Recommended Practice” has the meaning
given by section 637(3) (investment trusts: profits or losses of a capital nature).
(4)
The Treasury may by order amend the definition of “profits or losses of a
capital nature” in subsection (2), so far as it applies in relation to a venture
20
capital trust which prepares accounts in accordance with international
accounting standards.
Chapter 7
Chargeable gains arising in relation to derivative contracts
Introduction
25
639
Overview of Chapter
(1)
This Chapter makes provision about cases in which—
(a)
credits and debits are not to be brought into account in accordance with
section 574 (non-trading credits and debits to be brought into account
under Part 5: loan relationships) (see sections 640 and 643 to 650), but
30
(b)
instead profits arising to a company from its derivative contracts are
chargeable to corporation tax as chargeable gains (see sections 641 to
650).
(2)
This Chapter also makes provision about cases in which—
(a)
credits and debits are not to be brought into account in accordance with
35
section 573 (trading credits and debits to be brought into account under
Part 3: trading income) or section 574 (non-trading credits and debits to
be brought into under Part 5: loan relationships) (see section 651), but
(b)
instead provisions relating to corporation tax on chargeable gains
apply in relation to derivative contracts (see sections 652 to 658).
40