Corporation Tax Bill

House of Commons

Session 2008 - 09
Internet Publications
Other Bills before Parliament

Corporation Tax Bill

Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 7 — Chargeable gains arising in relation to derivative contracts
314

Some credits and debits not to be brought into account under Part 3 or 5
651
Credits and debits not to be brought into account under Part 3 or Part 5
(1)
If the provisions in subsection (2)(a) or (b) apply to a derivative contract for an
accounting period, sections 573 (trading credits and debits to be brought into
account under Part 3: trading income) and 574 (non-trading credits and debits
5
to be brought into account under Part 5: loan relationships) do not apply to the
relevant credits and debits.
(2)
The provisions are—
(a)
sections 653 to 655 (issuers of securities with embedded derivatives:
deemed options), and
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(b)
section 658 (issuers of securities with embedded derivatives: deemed
contracts for differences).
(3)
For the cases in which sections 653 to 655 and section 658 apply, see sections
652 and 656 respectively.
(4)
For the provision which applies where sections 653 to 655 or 658 apply, see
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those sections.
Issuers of securities with embedded derivatives: deemed options
652
Introduction to sections 653 to 655
(1)
Sections 653 to 655 apply to a derivative contract of a company for an
accounting period if each of conditions A to E is met.
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(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 debtor relationship of the company.
(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).
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(4)
Condition C is that the underlying subject matter of the derivative contract is
shares.
(5)
Condition D is that at the time when the company became a party to the debtor
relationship—
(a)
it was not carrying on a banking business or a business as a securities
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house, or
(b)
if it was carrying on such a business, it did not become a party to the
debtor relationship in the ordinary course of that business.
(6)
Condition E is that the company is not an excluded body.
(7)
In this section “option” is to be construed as if section 580(2) and (3) (meaning
35
of “option”) were omitted.
653
Shares issued or transferred as a result of exercise of deemed option
(1)
Subsections (2) and (3) apply if—
(a)
the option mentioned in section 652(3) is exercised at any time in the
accounting period, and
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Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 7 — Chargeable gains arising in relation to derivative contracts
315

(b)
shares are issued or transferred in fulfilment of the obligations under
the option (“the relevant disposal”).
(2)
Section 144(2) of TCGA 1992 (exercise of options) applies to the relevant
disposal as if the carrying value of the option at the time the company became
a party to the debtor relationship mentioned in section 652(2) were the
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consideration for the grant of the option.
(3)
So far as it would otherwise apply, section 17(1) of TCGA 1992 (deemed market
value consideration) does not apply to the relevant disposal.
654
Payment instead of disposal on exercise of deemed option
(1)
Subsection (2) applies if—
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(a)
the option mentioned in section 652(3) is exercised at any time in the
accounting period,
(b)
no shares are issued or transferred in fulfilment of the obligations
under the option, and
(c)
an amount is paid in fulfilment of those obligations.
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(2)
If —
(a)
CV exceeds X, a chargeable gain equal to the amount of the excess is
treated as accruing to the company in the accounting period,
(b)
X exceeds CV, an allowable loss equal to the amount of the excess is
treated as accruing to the company in the accounting period.
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(3)
In this section—
“CV” means—
(a)
if the company was a party to the debtor relationship
mentioned in section 652(2) at the time it was created, the
carrying value of the option at that time, or
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(b)
if the company became a party to that relationship at a later
time, the carrying value of the option at that time,
“X” means the amount paid by the debtor in fulfilment of the obligations
under the debtor relationship reduced (but not below nil) by the fair
value of the host contract at the date on which the option is exercised,
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and
“the host contract” means the loan relationship to which the company is
treated as a party under section 415(2) (loan relationships with
embedded derivatives) because of the debtor relationship.
655
Ceasing to be party to debtor relationship when deemed option not exercised
35
(1)
Subsection (2) applies if the company ceases to be a party to the debtor
relationship mentioned in section 652(2) at a time when the option mentioned
in section 652(3) has not been exercised.
(2)
The company is treated for the purposes of corporation tax on chargeable
gains—
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(a)
as having acquired an asset for consideration of an amount equal to Y,
and
(b)
as having disposed of that asset for consideration of an amount equal
to CV.
(3)
In this section—
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Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 7 — Chargeable gains arising in relation to derivative contracts
316

“CV” has the same meaning as in section 654,
“Y” means—
(a)
if the company ceases to be a party to the debtor relationship as
a result of the redemption or repayment of the liability
representing that relationship, the amount paid by the
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company, or
(b)
otherwise, the consideration given by the company on its
ceasing to be a party to that relationship,
in either case reduced (but not below nil) by the fair value of the host
contract at the date on which it so ceases, and
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“the host contract” has the same meaning as in section 654.
Issuers of securities with embedded derivatives: deemed contracts for differences
656
Introduction to section 658
(1)
Section 658 (chargeable gain or allowable loss treated as accruing) applies to a
derivative contract of a company for an accounting period if each of conditions
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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 debtor relationship of the company.
(3)
Condition B is that the derivative contract—
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(a)
is treated as a contract for differences by section 585(3) (contract treated
as option, future or contract for differences), and
(b)
is not within section 652.
(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
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shares.
(6)
Condition E is that at the time when the company became a party to the debtor
relationship—
(a)
it was not carrying on a banking business or a business as a securities
house, or
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(b)
if it was carrying on such a business, it did not become a party to the
debtor relationship in the ordinary course of that business.
(7)
Condition F is that the company is not an excluded body.
(8)
For the meaning of “exactly tracking contract”, see section 657.
657
Meaning of “exactly tracking contract” in section 656
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(1)
This section applies for the purposes of section 656.
(2)
“Exactly tracking contract” means a contract where the amount which is to be
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—
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(a)
the value of the assets which are the underlying subject matter
of the contract, or

Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 7 — Chargeable gains arising in relation to derivative contracts
317

(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 proceeds of issue of the liability
which represents the debtor relationship mentioned in section 656(2).
(3)
In subsection (2) “the relevant period” means—
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(a)
the period between—
(i)
the date when the liability representing that debtor relationship
came into existence, and
(ii)
the date when the creditor relationship corresponding to that
debtor relationship comes to an end, or
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(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 the liability
representing that debtor relationship.
658
Chargeable gain or allowable loss treated as accruing
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(1)
Subsection (2) applies if—
(a)
the debtor relationship mentioned in section 656(2) comes to an end,
and
(b)
an amount (“the discharge amount”) is paid to discharge all the
company’s obligations under that relationship.
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(2)
For the purposes of corporation tax on chargeable gains, a chargeable gain or
allowable loss equal to the amount mentioned in subsection (3) is treated as
accruing to the company.
(3)
That amount is the amount of the gain or loss (as the case may be) which would
accrue on the assumptions in subsection (4).
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(4)
Those assumptions are that—
(a)
the derivative contract is an asset of the company,
(b)
there is a disposal of that asset at the time when the debtor relationship
comes to an end,
(c)
the consideration for the disposal of that asset is equal to the relevant
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amount, and
(d)
the cost of the asset is equal to the discharge amount.
(5)
In subsection (4) “the relevant amount” means—
(a)
if the company was a party to the debtor relationship at the time it was
created, the amount of the proceeds of issue of the security representing
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that relationship, or
(b)
if the company became a party to the debtor relationship after that time,
the amount of the carrying value of the host contract at that time.
(6)
In this section “the host contract” means the loan relationship to which the
company is treated as a party under section 415(2) (loan relationships with
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embedded derivatives) because of the debtor relationship.