Corporation Tax Bill

House of Commons

Session 2008 - 09
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Corporation Tax Bill

Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 8 — Further provision about chargeable gains and derivative contracts
318

Interpretation
659
Meaning of “relevant credits” and “relevant debits”
(1)
This section applies for the purposes of this Chapter.
(2)
In the case of a derivative contract which is not one to which section 650
(property based total return swaps) applies for an accounting period, the
5
relevant credits and debits are the credits and debits which are given in relation
to the derivative contract for the accounting period by section 595.
(3)
In the case of a derivative contract to which section 650 applies for an
accounting period, the relevant credits and debits are the credits and debits
which—
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(a)
are given in relation to the derivative contract for the accounting period
by section 595, and
(b)
are within subsection (4).
(4)
The credits and debits are those found for the period by applying R% to N,
where—
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N is the amount which is the notional principal amount in the case of the
derivative contract, and
R% is the percentage change (if any) in the capital value index over the
relevant period.
(5)
In subsection (4) “the relevant period” means—
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(a)
the accounting period, if the company is a party to the derivative
contract throughout that period,
(b)
in any other case, any part of the accounting period throughout which
the company is a party to the derivative contract.
(6)
For the meaning of “the capital value index”, see section 650(4).
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Chapter 8
Further provision about chargeable gains and derivative contracts
Company ceasing to be party to certain contracts
660
Contract relating to holding in OEIC, unit trust or offshore fund
(1)
This section applies if—
30
(a)
a company is a party to a relevant contract in two successive accounting
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 of those
periods but not the first, and
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(c)
immediately before the beginning of the second period the relevant
contract was a chargeable asset.
(2)
The company must bring into account for the accounting period in which it
ceases to be a party to the contract the amount of any chargeable gain or
allowable loss which would have been treated as accruing to it on the
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assumptions in subsection (3).

Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 8 — Further provision about chargeable gains and derivative contracts
319

(3)
Those assumptions are that—
(a)
the company disposed of the relevant contract immediately before the
beginning of the second period mentioned in subsection (1), and
(b)
the disposal was for consideration of an amount equal to the value (if
any) given to the relevant contract in the accounts of the company at the
5
end of the first such period.
661
Contract which becomes derivative contract
(1)
This section applies if—
(a)
a company is a party to a relevant contract which (not having been a
derivative contract) becomes a derivative contract, and
10
(b)
immediately before the relevant contract becomes a derivative contract
it is a chargeable asset.
(2)
The company must bring into account for the accounting period in which it
ceases to be a party to the relevant contract the amount of any chargeable gain
or allowable loss which would have been treated as accruing to it on the
15
assumptions in subsection (3).
(3)
Those assumptions are that—
(a)
the company disposed of the relevant contract immediately before the
relevant time, and
(b)
the disposal was for consideration of an amount equal to the notional
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carrying value of the relevant contract at that time.
(4)
In this section “the relevant time” means the time when the relevant contract
becomes a derivative contract.
(5)
Section 622(4) (meaning of “notional carrying value”) applies for the purposes
of this section.
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Contracts ceasing to be derivative contracts
662
Contracts ceasing to be derivative contracts
(1)
This section applies if a company is a party to a relevant contract which ceases
to be a derivative contract.
(2)
The company is treated for the purposes of corporation tax on chargeable gains
30
as if it had acquired the contract immediately after the relevant time for
consideration of an amount equal to the notional carrying value of the contract
at that time.
(3)
In this section “the relevant time” means the time when the contract ceases to
be a derivative contract.
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(4)
Section 622(4) (meaning of “notional carrying value”) applies for the purposes
of this section.
Carry back of net losses on certain derivative contracts
663
Contracts to which section 641 applies
(1)
This section applies in the case of a company if—
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Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 8 — Further provision about chargeable gains and derivative contracts
320

(a)
there are net section 641 losses for an accounting period (“the loss
period”),
(b)
there are net section 641 gains for a previous accounting period (“the
gains period”),
(c)
the gains period falls wholly or partly within the period of 24 months
5
immediately preceding the start of the loss period, and
(d)
within two years after the end of the loss period the company makes a
claim in respect of the whole or a part of the net section 641 losses for
the loss period.
(2)
The net section 641 gains for the gains period are reduced (but not below nil)
10
by the amount in respect of which the claim is made.
(3)
And the net section 641 losses for the loss period are reduced by the amount in
respect of which the claim is made.
(4)
For the purposes of this section—
(a)
the net section 641 gains for a later period are reduced so far as possible
15
before the net section 641 gains for an earlier period, and
(b)
where a gains period falls partly before the start of the 24 month period
mentioned in subsection (1), only the appropriate fraction of the net
section 641 gains for that period may be reduced.
(5)
For the meaning of “net section 641 gains”, “net section 641 losses” and “the
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appropriate fraction”, see section 664.
664
Meaning of certain expressions in section 663
(1)
This section applies for the purposes of section 663.
(2)
If for an accounting period L exceeds G, there are net section 641 losses for the
period of an amount equal to the excess.
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(3)
If for an accounting period G exceeds the sum of L and N, there are net section
641 gains for the period of an amount equal to the excess.
(4)
In this section—
G is the sum of the amounts of any chargeable gains treated as accruing to
the company in the period under section 641(3)(a) in respect of
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derivative contracts of the company (“section 641 gains”),
L is the sum of the amounts of any allowable losses treated as accruing to
the company in the period under section 641(3)(b) in respect of
derivative contracts of the company (“section 641 losses“), and
N is the sum of the amounts of any non-section 641 losses which would
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fall to be deducted in the period from section 641 gains, on the
assumption in subsection (5).
(5)
That assumption is that, as respects the accounting period, non-section 641
losses are treated as being deducted from non-section 641 gains, so far as
possible, before any remainder is deducted from section 641 gains.
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Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 8 — Further provision about chargeable gains and derivative contracts
321

(6)
The “appropriate fraction” is—

where—
A is the number of days in the gains period which fall within the 24 month
period mentioned in section 663(1)(c), and
B is the number of days in the gains period.
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(7)
In this section—
“deducted” means deducted in accordance with section 8(1) of TCGA
1992 (company’s total profits to include chargeable gains),
“the gains period” has the same meaning as in section 663,
“non-section 641 gains” means any chargeable gains accruing to the
10
company in the accounting period, other than section 641 gains, and
“non-section 641 losses” means any allowable losses of the company
which may be deducted in the accounting period, other than section
641 losses.
Issuers of securities with embedded derivatives: equity instruments
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665
Introduction to section 666
(1)
Section 666 (allowable loss treated as accruing) applies to a company for an
accounting period if each of conditions A to F is met.
(2)
Condition A is that the company is treated as a party to a relevant contract
under section 585(2) (loan relationships with embedded derivatives) because
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of a debtor relationship of the company.
(3)
Condition B is that the division mentioned in section 585(1) (loan relationships
with embedded derivatives) in the case of the debtor relationship is between—
(a)
rights and liabilities under a loan relationship, and
(b)
rights and liabilities under an equity instrument of the company.
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(4)
Condition C is that the relevant contract is treated as an option by section
585(3) (contract treated as option, future or contract for differences).
(5)
Condition D is that the company pays an amount in the accounting period to
the person who is a party to the debtor relationship as creditor in discharge of
any obligations under that relationship.
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(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
(b)
if it was carrying on such a business, it did not become a party to that
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relationship in the ordinary course of that business.
(7)
Condition F is that the company is not an excluded body.

Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 8 — Further provision about chargeable gains and derivative contracts
322

(8)
In this section “option” is to be construed as if section 580(2) and (3) (meaning
of “option”) were omitted.
666
Allowable loss treated as accruing
(1)
If A exceeds B, an allowable loss equal to the amount of the excess is treated as
accruing to the company in the accounting period for the purposes of
5
corporation tax on chargeable gains.
(2)
In this section—
A is the amount paid as mentioned in section 665(5) reduced (but not
below nil) by an amount equal to the fair value of the host contract at
the time that amount is paid,
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B is the amount treated as the carrying value of the relevant contract
mentioned in section 665(4) at the time the company became a party to
the debtor relationship mentioned in section 665(2), and
“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.
Treatment of shares acquired in certain circumstances
667
Shares acquired on exercise of non-embedded option
(1)
This section applies if—
(a)
a company is a party to a derivative contract in an accounting period,
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(b)
the derivative contract is a plain vanilla contract,
(c)
the contract is an option,
(d)
rights to acquire shares are comprised in the contract, and
(e)
shares are acquired as a result of the exercise of any of those rights in
the accounting period.
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(2)
For the purpose of calculating any chargeable gain accruing to the company on
a disposal by it of all the shares so acquired, the sums allowable as a deduction
under section 38(1)(a) of TCGA 1992 (acquisition costs) are—
(a)
if G exceeds L, increased by the amount of that excess,
(b)
if L exceeds G, reduced by the amount of that excess,
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and, in the case of a part disposal of those shares, section 42(2) of that Act (part
disposals) has effect accordingly.
(3)
If the amount of the excess in subsection (2)(b) is greater than the amount of
expenditure allowable under section 38(1)(a) of TCGA 1992, the amount of the
excess which cannot be deducted from the expenditure so allowable is, for the
35
purpose mentioned in subsection (2), added to the amount of the consideration
for the disposal of the shares.
(4)
For the meaning of G and L, see section 669.
668
Shares acquired on running of future to delivery
(1)
This section applies if—
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(a)
a company is a party to a derivative contract in an accounting period,
(b)
the derivative contract is a plain vanilla contract,

Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 8 — Further provision about chargeable gains and derivative contracts
323

(c)
the contract is a future, and
(d)
delivery is taken of shares in accordance with the terms of the future.
(2)
For the purpose of calculating any chargeable gain accruing to the company on
a disposal by it of all the shares so delivered, the sums allowable as a deduction
under section 38(1)(a) of TCGA 1992 (acquisition costs) are—
5
(a)
if G exceeds L, increased by the amount of that excess,
(b)
if L exceeds G, reduced by the amount of that excess,

and, in the case of a part disposal of those shares, section 42(2) of that Act (part
disposals) has effect accordingly.
(3)
If the amount of the excess in subsection (2)(b) is greater than the amount of
10
expenditure allowable under section 38(1)(a) of TCGA 1992, the amount of the
excess which cannot be deducted from the expenditure so allowable is, for the
purpose mentioned in subsection (2), added to the amount of the consideration
for the disposal of the shares.
(4)
For the meaning of G and L, see section 669.
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669
Meaning of G and L in sections 667 and 668
(1)
This section applies for the purposes of sections 667 and 668.
(2)
G is the sum of the credits brought into account under section 574 (non-trading
credits and debits to be brought into account under Part 5) in respect of the
derivative contract in each relevant accounting period so far as referable, on a
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just and reasonable apportionment, to the shares acquired as a result of the
exercise of rights mentioned in section 667(1)(e) or the delivery mentioned in
section 668(1)(d).
(3)
L is the sum of the debits brought into account under section 574 in respect of
the derivative contract in each relevant accounting period, so far as so
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referable.
(4)
In this section “relevant accounting period” means—
(a)
the accounting period in which the disposal in question is made, or
(b)
any previous accounting period.
Treatment of net gains and losses on exercise of option
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670
Treatment of net gains and losses on exercise of option
(1)
This section applies if—
(a)
a derivative contract is one to which section 645 (creditor relationships:
embedded derivatives which are options) applies for an accounting
period,
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(b)
rights to acquire shares fall to be treated as comprised in the derivative
contract because of section 585(2), and
(c)
any of those rights are exercised or otherwise disposed of in the
accounting period.
(2)
Subsection (3) applies if there is a disposal of the asset representing the creditor
40
relationship mentioned in section 645(2).

Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 8 — Further provision about chargeable gains and derivative contracts
324

(3)
For the purpose of calculating any chargeable gain accruing to the company on
the disposal, the sums allowable as a deduction under section 38(1)(a) of TCGA
1992 (acquisition costs) are—
(a)
if the sum of G and CV exceeds L, increased by the amount of that
excess,
5
(b)
if L exceeds the sum of G and CV, reduced by the amount of that excess.
(4)
Subsection (5) applies if there is a disposal of all or any of the shares (“the
relevant shares”) acquired—
(a)
as a result of the exercise of rights mentioned in subsection (1)(c), and
(b)
in circumstances where a disposal is deemed not to occur because of
10
section 127 of TCGA 1992 (equation of original shares and new
holding).
(5)
For the purpose of calculating any chargeable gain accruing to the company on
a disposal of all the relevant shares, the sums allowable as a deduction under
section 38(1)(a) of TCGA 1992 (acquisition costs) are—
15
(a)
if the sum of G and CV exceeds L, increased by the amount of that
excess,
(b)
if L exceeds the sum of G and CV, reduced by the amount of that excess,

and, in the case of a part disposal of those shares, section 42(2) of that Act (part
disposals) has effect accordingly.
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(6)
If the amount of the excess in subsection (3)(b) or (5)(b) is greater than the
amount of expenditure allowable under section 38(1)(a) of TCGA 1992, the
amount of the excess which cannot be deducted from the expenditure so
allowable is, for the purpose mentioned in subsection (3) or (5) (as the case may
be), added to the amount of the consideration for the disposal so mentioned.
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(7)
Sections 37 and 39 of TCGA 1992 (consideration chargeable to tax on income
and exclusion of expenditure by reference to tax on income) do not apply in
relation to a disposal mentioned in subsection (2) or (4) above.
(8)
For the meaning of G, L and CV, see section 671.
671
Meaning of G, L and CV in section 670
30
(1)
This section applies for the purposes of section 670.
(2)
G is the sum of the amounts of any chargeable gains treated as accruing to the
company under section 641(3)(a) (derivative contracts to be taxed on a
chargeable gains basis) in respect of the derivative contract in each relevant
accounting period, so far as referable, on a just and reasonable apportionment,
35
to the shares acquired as a result of the exercise of rights mentioned in section
670(1)(c).
(3)
L is the sum of the amounts of any allowable losses treated as accruing to the
company under section 641(3)(b) in respect of the derivative contract in each
relevant accounting period, so far as so referable.
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(4)
CV is the amount by which the carrying value of the host contract at the date
on which the option is exercised exceeds the carrying value of that contract at—
(a)
the date on which the company became a party to the creditor
relationship mentioned in section 645(2), or
(b)
(if later) the date on which the derivative contract became one to which
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section 645 applies.