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 7 — Chargeable gains arising in relation to derivative contracts
309

Some credits and debits not to be brought into account under Part 5
640
Credits and debits not to be brought into account under Part 5
(1)
If any of the provisions in subsection (2) applies to a derivative contract of a
company for an accounting period, section 574 (non-trading credits and debits
to be brought into account under Part 5: loan relationships) does not apply to
5
the relevant credits and debits.
(2)
The provisions are—
(a)
section 643 (contracts relating to land or certain tangible movable
property),
(b)
section 645 (creditor relationships: embedded derivatives which are
10
options),
(c)
section 648 (creditor relationships: embedded derivatives which are
exactly tracking contracts for differences), and
(d)
section 650 (property based total return swaps).
(3)
For the meaning of “relevant credits” and “relevant debits”, see section 659.
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(4)
For the treatment of the relevant credits and debits in the case of a derivative
contract to which section 643, 645, 648 or 650 applies, see section 641 (derivative
contracts to be taxed on a chargeable gains basis).
Some derivative contracts to be taxed on a chargeable gains basis
641
Derivative contracts to be taxed on a chargeable gains basis
20
(1)
This section applies to a derivative contract of a company for an accounting
period if any of the provisions in subsection (2) applies to the derivative
contract for the period.
(2)
The provisions are—
(a)
section 643 (contracts relating to land or certain tangible movable
25
property),
(b)
section 645 (creditor relationships: embedded derivatives which are
options),
(c)
section 648 (creditor relationships: embedded derivatives which are
exactly tracking contracts for differences), and
30
(d)
section 650 (property based total return swaps).
(3)
For the purposes of corporation tax on chargeable gains—
(a)
if C exceeds D, a chargeable gain equal to the amount of the excess is
treated as accruing to the company in the accounting period,
(b)
if D exceeds C, an allowable loss equal to the amount of the excess is
35
treated as accruing to the company in the accounting period.
(4)
“C” means the sum of the relevant credits for the accounting period in respect
of the derivative contract.
(5)
“D” means the sum of the relevant debits for the accounting period in respect
of the derivative contract.
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(6)
For a case in which this section does not apply, see section 642.

Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 7 — Chargeable gains arising in relation to derivative contracts
310

(7)
See also section 663 (carry back of net losses on derivative contracts to which
this section applies).
642
Exception from section 641
(1)
Section 641 does not apply to a derivative contract to which section 645 applies
if, on the assumptions in subsection (2), paragraph 2 of Schedule 7AC to TCGA
5
1992 (substantial shareholding exemptions: gain on disposal of asset related to
shares not a chargeable gain) would apply to the gain mentioned in subsection
(2)(d).
(2)
Those assumptions are that—
(a)
the rights and liabilities treated as comprised in the derivative contract
10
were contained in a separate contract,
(b)
that separate contract was an option,
(c)
that option was disposed of at the end of the accounting period, and
(d)
a gain accrued to the company on the disposal for the purposes of
corporation tax on chargeable gains.
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Derivative contracts to which sections 640 and 641 apply
643
Contracts relating to land or certain tangible movable property
(1)
This section applies to a derivative contract of a company for an accounting
period if conditions A, B and C are met.
(2)
Condition A is that the underlying subject matter of the derivative contract
20
consists of either or both of the following—
(a)
land,
(b)
tangible movable property, other than commodities which are tangible
assets.
(3)
Condition B is that the company is not a party to the derivative contract at any
25
time in the accounting period for the purposes of a trade carried on by it.
(4)
Condition C is that the company is not an excluded body.
(5)
For the case where the underlying subject matter of a derivative contract also
includes income from property within subsection (2)(a) or (b), see section 644.
644
Income to be left out of account in determining whether section 643 applies
30
(1)
This section applies if the underlying subject matter of a derivative contract
includes income from property within section 643(2)(a) or (b).
(2)
If that income is subordinate income, it is left out of account in determining for
the purposes of section 643 whether condition A is met.
(3)
Income is “subordinate income” if it is—
35
(a)
subordinate in relation to so much of the underlying subject matter of
the derivative contract as consists of property within section 643(2)(a)
or (b), or
(b)
of small value in comparison with the value of the underlying subject
matter as a whole.
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Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 7 — Chargeable gains arising in relation to derivative contracts
311

(4)
For the purposes of this section, whether part of the underlying subject matter
of a derivative contract of a company is subordinate or of small value is to be
determined by reference to the time when the company enters into or acquires
the contract.
645
Creditor relationships: embedded derivatives which are options
5
(1)
This section applies to a derivative contract of a company for an accounting
period if each of conditions A to E is met.
(2)
Condition A is that the derivative contract is a relevant contract to which the
company is treated as a party under section 585(2) (loan relationships with
embedded derivatives) because of a creditor relationship of the company.
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(3)
Condition B is that the derivative contract is treated as an option by section
585(3) (contract treated as option, future or contract for differences).
(4)
Condition C is that the underlying subject matter of the derivative contract—
(a)
is qualifying ordinary shares, or
(b)
is mandatorily convertible preference shares.
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(5)
Condition D is that the company is not a party to the creditor relationship at
any time in the accounting period for the purposes of a trade carried on by it.
(6)
Condition E is that the company is not an excluded body.
(7)
Where this section applies to a derivative contract, the asset representing the
creditor relationship is treated for corporation tax purposes as not being a
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qualifying corporate bond.
(8)
See also—
(a)
section 647 (meaning of certain expressions in this section), and
(b)
section 670 (treatment of net gains and losses on exercise of option).
646
Exclusions from section 645
25
(1)
Section 645 does not apply to a derivative contract of a company for an
accounting period if condition A or B is met in the period.
(2)
Condition A is that the rights and liabilities which fall to be treated as
comprised in the derivative contract are such that the extent to which shares
may be acquired in accordance with them is to be determined using a cash
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value—
(a)
which is specified in the contract for the asset representing the creditor
relationship mentioned in section 645(2), or
(b)
which is or will be ascertainable by reference to that contract.
(3)
Condition B is that the rights and liabilities which fall to be treated as
35
comprised in the derivative contract are such that—
(a)
the company is entitled or obliged to receive a payment instead of the
shares which are the underlying subject matter of the derivative
contract, and
(b)
the amount of that payment differs by more than an insignificant
40
amount from the value of the shares which the company would be
entitled to acquire in accordance with those rights and liabilities at the
time it became entitled or obliged to receive the payment.

Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 7 — Chargeable gains arising in relation to derivative contracts
312

647
Meaning of certain expressions in section 645
(1)
This section applies for the purposes of section 645.
(2)
“Mandatorily convertible preference shares” means shares which—
(a)
represent the creditor relationship mentioned in section 645(2),
(b)
are not qualifying ordinary shares, and
5
(c)
are issued upon terms which stipulate that they must be converted into,
or exchanged for, qualifying ordinary shares by a relevant time.
(3)
In subsection (2) “relevant time” means a time no more than 24 hours after the
acquisition of the shares by a person who, immediately before that acquisition,
had the creditor relationship.
10
(4)
“Qualifying ordinary shares” means shares in a company which satisfy
conditions A and B.
(5)
Condition A is that the shares are all or part of the issued share capital
(however described) of the company, other than—
(a)
capital the holders of which have a right to a dividend at a fixed rate but
15
have no other right to share in the profits of the company, or
(b)
capital the holders of which have no right to a dividend of any
description nor any other right to share in the profits of the company.
(6)
Condition B is that the shares—
(a)
are listed on a recognised stock exchange, or
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(b)
are shares in a holding company or a trading company.
(7)
In subsection (6) “holding company” and “trading company” have the same
meaning as in section 165 of TCGA 1992 (see section 165A of that Act).
648
Creditor relationships: embedded derivatives which are exactly tracking
contracts for differences
25
(1)
This section applies to a derivative contract of a company for an accounting
period if each of conditions A to F is met.
(2)
Condition A is that the derivative contract is a relevant contract to which the
company is treated as a party under section 585(2) (loan relationships with
embedded derivatives) because of a creditor relationship of the company.
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(3)
Condition B is that the derivative contract is treated as a contract for differences
by section 585(3) (contract treated as option, future or contract for differences).
(4)
Condition C is that the derivative contract is an exactly tracking contract.
(5)
Condition D is that the underlying subject matter of the derivative contract is
qualifying ordinary shares listed on a recognised stock exchange.
35
(6)
Condition E is that the company is not a party to the creditor relationship at
any time in the accounting period for the purposes of a trade carried on by it.
(7)
Condition F is that the company is not an excluded body.
(8)
Where this section applies to a derivative contract, the asset representing the
creditor relationship is treated for corporation tax purposes as not being a
40
qualifying corporate bond.

Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 7 — Chargeable gains arising in relation to derivative contracts
313

(9)
See also section 672 (treatment of net gains and losses on disposal of certain
embedded derivatives).
649
Meaning of certain expressions in section 648
(1)
This section applies for the purposes of section 648.
(2)
“Exactly tracking contract” means a contract where the amount which is to be
5
paid to discharge the rights and liabilities which fall to be treated as comprised
in the contract is equal to the amount found by applying R% to C, where—
R% is the percentage change (if any) over the relevant period in—
(a)
the value of the assets which are the underlying subject matter
of the contract, or
10
(b)
any index of the value of those assets, and
C is the amount falling to be regarded in accordance with generally
accepted accounting practice as the cost of the asset representing the
creditor relationship mentioned in section 648(2) on the date when that
asset came into existence.
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(3)
In subsection (2) “the relevant period” means—
(a)
the period between—
(i)
the date when the asset representing that creditor relationship
came into existence, and
(ii)
the date when the debtor relationship corresponding to that
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creditor relationship comes to an end, or
(b)
any other period in which almost all of that period falls, and which
differs from that period only for purposes connected with giving effect
to a valuation in relation to rights or liabilities under that asset.
(4)
“Qualifying ordinary shares” means shares in a company which are all or part
25
of the issued share capital (however described) of the company, other than—
(a)
capital the holders of which have a right to a dividend at a fixed rate but
have no other right to share in the profits of the company, or
(b)
capital the holders of which have no right to a dividend of any
description nor any other right to share in the profits of the company.
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650
Property based total return swaps
(1)
This section applies to a derivative contract of a company for an accounting
period if each of conditions A to F is met.
(2)
Condition A is that the derivative contract is a contract for differences.
(3)
Condition B is that one or more indices are specified in the contract.
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(4)
Condition C is that at least one index so specified (“the capital value index”) is
an index of changes in the value of land.
(5)
Condition D is that the underlying subject matter of the derivative contract also
includes interest rates.
(6)
Condition E is that the company is not a party to the derivative contract at any
40
time in the accounting period for the purposes of a trade carried on by it.
(7)
Condition F is that the company is not an excluded body.