Corporation Tax Bill

House of Commons

Session 2008 - 09
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Corporation Tax Bill

Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 12 — Priority rules
339

(2)
The relevant avoidance intention is the intention of eliminating or reducing the
credits to be brought into account in accordance with this Part.
(3)
Consideration is not fully recognised if, as a result of the application of
generally accepted accounting practice, the full amount or value of the
consideration is not recognised in determining the company’s profit or loss for
5
the relevant accounting period or any other accounting period.
(4)
In determining the credits which the company is to bring into account for the
relevant accounting period in accordance with this Part, it is to be assumed that
the whole of the consideration is recognised in determining the company’s
profit or loss for that period.
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(5)
But this section does not apply if paragraph 1(2) of Schedule 28AA to ICTA
(provision not at arm’s length) operates in relation to the disposal so as to
increase the tax liability of the company.
Chapter 12
Priority rules
15
699
Priority of this Part for corporation tax purposes
(1)
The amounts which are brought into account in accordance with this Part in
respect of any matter are the only amounts which may be brought into account
for corporation tax purposes in respect of it.
(2)
Subsection (1) is subject to any provision to the contrary.
20
(3)
For such provisions, see in particular—
(a)
section 616 (disapplication of fair value accounting for certain
derivative contracts),
(b)
paragraph 93 of Schedule 2 (plain vanilla contracts which became
derivative contracts before 30 December 2006), and
25
(c)
section 83(2ZA) of FA 1989 (life assurance: receipts to be taken into
account).
700
Relationship of this Part to Part 5: loan relationships
(1)
This section applies if—
(a)
a company is a party to a loan relationship because of a derivative
30
contract, and
(b)
in accordance with this Part, a profit or loss accrues to the company on
the contract for an accounting period (“the derivative profit or loss”).
(2)
The general rule is that this Part does not apply to the derivative profit or loss
if—
35
(a)
an amount representing the derivative profit or loss, or
(b)
an amount representing the profit or loss accruing to that company on
the contract,

is brought into account for that period for the purposes of Part 5 otherwise than
because of section 574.
40
(3)
But in a case where section 585 (loan relationships with embedded derivatives)
applies, the general rule does not apply so far as—

Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 13 — General and supplementary provisions
340

(a)
the derivative profit or loss accrues from the rights and liabilities
mentioned in section 585(1)(b) (rights and liabilities under derivative
financial instruments or equity instruments), and
(b)
that profit or loss is dealt with in accordance with that section and this
Part.
5
Chapter 13
General and supplementary provisions
Power to amend certain provisions
701
Power to amend some provisions
(1)
The Treasury may by order amend—
10
(a)
Chapter 2 (except sections 578(1), (2) and (4), 585, 587 and 588),
(b)
Chapter 4 (except section 613(4)),
(c)
section 635,
(d)
Chapter 7,
(e)
Chapter 8 (except section 660),
15
(f)
section 702,
(g)
section 706,
(h)
section 707,
(i)
section 708,
(j)
section 709,
20
(k)
the definitions in section 710 specified in subsection (2), and
(l)
paragraphs 80 to 94 of Schedule 2.
(2)
The definitions mentioned in subsection (1)(k) are—
capital redemption policy,
depositary receipt (in relation to shares),
25
designated,
intangible fixed assets,
shares, and
warrant.
(3)
The provision that may be made by an order under this section includes
30
provision—
(a)
adding to or varying the descriptions of contract which are derivative
contracts within section 576 (meaning of “derivative contract”) or
removing any such description of contract, or
(b)
adding to or varying the descriptions of contract which are excluded
35
under section 589 (contracts excluded because of underlying subject
matter: general) or removing any such description of contract.
(4)
The provision that may be made under subsection (3)(b), in relation to
contracts which are excluded under section 589, includes provision—
(a)
adding to the provisions which qualify the exclusion of contracts under
40
that section,
(b)
varying any such provision, or
(c)
removing any such provision.

Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 13 — General and supplementary provisions
341

(5)
An order under this section may provide for any of its provisions to have effect
in relation to—
(a)
accounting periods ending on or after the day on which the order
comes into force (whenever they begin),
(b)
periods of account beginning before the order is made, but not earlier
5
than the beginning of the calendar year in which it is made.
(6)
An order under this section may—
(a)
make different provision for different cases, and
(b)
contain incidental, supplemental, consequential and transitional
provision and savings (including provision amending any enactment
10
or any instrument made under an enactment).
Other general definitions
702
“Carrying value”
(1)
For the purposes of this Part, the “carrying value” of a contract includes
amounts recognised for accounting purposes in relation to the contract in
15
respect of—
(a)
accrued amounts,
(b)
amounts paid or received in advance, or
(c)
impairment losses (including provisions for bad or doubtful debts).
(2)
In determining the profits and losses to be recognised in determining the
20
carrying value of the contract for the purposes of this Part, the provisions in
subsection (3) apply as they apply for the purposes of determining the credits
and debits to be brought into account in accordance with this Part.
(3)
Those provisions are—
(a)
section 584 (hybrid derivatives with embedded derivatives),
25
(b)
section 585 (loan relationships with embedded derivatives),
(c)
section 586 (other contracts with embedded derivatives),
(d)
section 625(3) to (5) (transactions within groups),
(e)
sections 675 and 676 (European cross-border transfers of business), and
(f)
sections 684 and 685 (European cross-border mergers).
30
(4)
In this section “impairment loss” means a debit in respect of the impairment of
a financial asset, and “impairment” includes uncollectability.
703
“Chargeable asset”
(1)
For the purposes of this Part, an asset is a chargeable asset if any gain accruing
on its disposal would be a chargeable gain for corporation tax purposes.
35
(2)
For the purposes of this section, “asset” includes any obligations under futures
contracts which are regarded because of section 143 of TCGA 1992 as assets to
the disposal of which that Act applies.
704
“Creditor relationship” and “debtor relationship”
(1)
In this Part “creditor relationship” has the same meaning as in Part 5 (loan
40
relationships) (see section 302(5) (meaning of “creditor relationship”)).

Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 13 — General and supplementary provisions
342

(2)
In this Part “debtor relationship” has the same meaning as in that Part (see
section 302(6) (meaning of “debtor relationship”)).
705
Expressions relating to exchange gains and losses
(1)
References in this Part to exchange gains or exchange losses, in relation to a
company, are references respectively to—
5
(a)
profits or gains which arise as a result of comparing at different times
the expression in one currency of the whole or some part of the
valuation put by the company in another currency on an asset or
liability of the company, or
(b)
losses which so arise.
10
(2)
If the result of such a comparison is that neither an exchange gain nor an
exchange loss arises, for the purposes of this Part an exchange gain of nil is
taken to arise in the case of that comparison.
(3)
The Treasury may make provision by regulations as to the way in which
exchange gains or losses are to be calculated for the purposes of this section in
15
a case where fair value accounting is used by the company.
(4)
The regulations may be made so as to apply to periods of account beginning
before the regulations are made, but not earlier than the beginning of the
calendar year in which they are made.
(5)
Any reference in this Part to an exchange gain or loss from a derivative contract
20
of a company is a reference to an exchange gain or loss arising to a company in
relation to a derivative contract of the company.
706
“Excluded body”
In this Part “excluded body” means—
an authorised unit trust,
25
an investment trust,
an open-ended investment company, or
a venture capital trust.
707
“Hedging relationship”
(1)
This section applies for the purposes of this Part.
30
(2)
A company has a “hedging relationship” between a relevant contract (“the
hedging instrument”) and an asset or liability (“the hedged item”) so far as
condition A or B is met.
(3)
Condition A is that the hedging instrument and the hedged item are
designated as a hedge by the company.
35
(4)
Condition B is that—
(a)
the hedging instrument is intended to act as a hedge of the exposure to
changes in fair value of the hedged item which is attributable to a
particular risk and could affect the profit or loss of the company, and
(b)
the hedged item is an asset or liability recognised for accountancy
40
purposes or is an identified portion of such an asset or liability.

Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 13 — General and supplementary provisions
343

(5)
For the purposes of subsections (2) and (4), the liabilities of a company include
its own share capital.
708
“Plain vanilla contract”
In this Part “plain vanilla contract” means a relevant contract other than one to
which a company is treated as being a party under—
5
(a)
section 584 (hybrid derivatives with embedded derivatives),
(b)
section 585 (loan relationships with embedded derivatives), or
(c)
section 586 (other contracts with embedded derivatives).
709
“Securities house”
In this Part “securities house” means a person—
10
(a)
who is authorised for the purposes of FISMA 2000, and
(b)
whose business consists wholly or mainly of dealing as a principal in
financial instruments within the meaning of section 984 of ITA 2007.
710
Other definitions
In this Part—
15
“bank” means—
(a)
the Bank of England,
(b)
a person within section 840A(1)(b) of ICTA, or
(c)
a firm within section 840A(1)(c) of that Act,
“capital redemption policy” means a contract made in the course of capital
20
redemption business (as defined in section 431(2ZF) of ICTA),
“contract of insurance” has the meaning given by section 431(2) of ICTA,
“contract of long-term insurance” has the meaning given by section 431(2)
of ICTA,
“depositary receipt”, in relation to shares (as defined in this section), has
25
the same meaning as it has in Part 4 of FA 1986 in relation to shares
(within the meaning of that Part),
“designated” has the meaning it has for accounting purposes,
“equity instrument” has the meaning it has for accounting purposes,
“fair value”, in relation to a derivative contract of a company, means the
30
amount which, at the time as at which the value is to be determined, is
the amount which the company would obtain from or, as the case may
be, would have to pay to an independent person dealing at arm’s
length for—
(a)
the transfer of the company’s rights under the contract, and
35
(b)
the release of all the company’s liabilities under it,
“fair value accounting” means a basis of accounting under which assets
and liabilities are shown in the company’s balance sheet at their fair
value,
“financial trader” means—
40
(a)
a person who—
(i)
is within section 31(1)(a), (b) or (c) of FISMA 2000, and
(ii)
has permission under that Act to carry on one or more
of the activities specified in Article 14 and, in so far as it
applies to that Article, Article 64 of the Financial
45

Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 13 — General and supplementary provisions
344

Services and Markets Act (Regulated Activities) Order
2001 (S.I. 2001/544), or
(b)
a person not within paragraph (a) who is approved by the
Commissioners for Her Majesty’s Revenue and Customs for the
purposes of this section,
5
“income statement” has the meaning it has for accounting purposes,
“intangible fixed asset” has the same meaning as in Part 8 (intangible fixed
assets), and sections 804 to 807 and 809 (assets wholly excluded from
that Part) (and sections 800 to 802 so far as they relate to those sections)
apply for the purposes of this Part as they apply for the purposes of that
10
Part,
“open-ended investment company” has the meaning given by section
468A(2) of ICTA,
“profit-sharing arrangements”, in relation to a firm, has the meaning
given by section 1262(4) (allocation of firm’s profits or losses between
15
partners),
“shares”, in relation to a company, means any shares in the company
under which an entitlement to receive distributions may arise,
including—
(a)
a depositary receipt for shares under which such an entitlement
20
may arise, and
(b)
in the case of a company which has no share capital, any
interests in the company possessed by members of the
company,
“statement of changes in equity” has the meaning it has for accounting
25
purposes,
“statement of comprehensive income” has the meaning it has for
accounting purposes,
“statement of income and retained earnings” has the meaning it has for
accounting purposes,
30
“statement of recognised income and expense” has the meaning it has for
accounting purposes,
“statement of total recognised gains and losses” has the meaning it has for
accounting purposes, and
“warrant” means an instrument which entitles the holder to subscribe
35
for—
(a)
shares in a company, or
(b)
assets representing a loan relationship of a company,
whether or not the shares or assets exist or are identifiable.

Corporation Tax Bill
Part 8 — Intangible fixed assets
Chapter 1 — Introduction
345

Part 8
Intangible fixed assets
Chapter 1
Introduction
Introductory
5
711
Overview of Part
(1)
This Part sets out how a company’s gains and losses in respect of intangible
fixed assets are calculated and brought into account for corporation tax
purposes.
(2)
For the meaning of “intangible fixed assets” and rules about the assets to which
10
this Part applies, see—
(a)
sections 712 to 715,
(b)
Chapter 10 (excluded assets), and
(c)
Chapter 16 (pre-FA 2002 assets etc).
(3)
For how such gains and losses are calculated and brought into account, see, in
15
particular, Chapter 6 which—
(a)
deals with the use of credits and debits in respect of some intangible
fixed assets in calculating the profits and losses of trades, businesses
and other concerns (see sections 747 to 750),
(b)
provides for the calculation of gains and losses where there are credits
20
or debits in respect of other intangible fixed assets (see section 751),
(c)
makes gains so calculated subject to the charge to corporation tax on
income (see section 752), and
(d)
gives an allowance for losses so calculated (see section 753).
(4)
For the priority of this Part for corporation tax purposes, see Chapter 18 (under
25
which the general rule is that the amounts brought into account in accordance
with this Part in respect of any matter are the only amounts that may be
brought into account for corporation tax purposes in respect of it).
(5)
This Part operates by reference to the accounts of companies and amounts
recognised for accounting purposes.
30
(6)
For the meaning of “amounts recognised for accounting purposes” and other
expressions related to accounting and for rules about “GAAP-compliant
accounts”, see sections 716 to 719.
(7)
Chapters 2 to 6 contain basic rules about the credits and debits to be brought
into account for corporation tax purposes in respect of intangible fixed assets.
35
(8)
For rules about particular situations and cases, see—
(a)
Chapter 7 (roll-over relief in case of realisation and reinvestment),
(b)
Chapters 8 and 9 (groups of companies),
(c)
Chapter 11 (transfer of business or trade),
(d)
Chapter 12 and 13 (related parties),
40
(e)
Chapter 14 (further provisions relating to miscellaneous cases),
(f)
Chapter 15 (adjustments on change of accounting policies), and