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HMRC have published a technical paper on the changes planned for the corporation tax rules on loan relationships and derivative contracts where amounts are not fully recognised for accounting purposes.
The current rules provide that the amounts to be brought into account for tax purposes are those that, in accordance with generally accepted accounting practice (GAAP), are recognised in determining a company’s profit or loss for the period.
In certain circumstances, where assets and liabilities are ‘matched’, GAAP may permit or require the whole or part of those assets and liabilities not to be recognised. As a result, amounts which would otherwise be brought into account for tax purposes are not brought into account.
Finance Act 2006 introduced measures – now incorporated in CTA 2009, s 311 and s 312 (for loan relationships) and s 599A and s 599B (for derivatives) – to counter avoidance involving accounting and tax derecognition of credits arising on a company’s loan relationships, where an interest receipt is matched with the payment of a dividend on ‘liabilities’, and there is as a consequence no net liability to tax, even though no deduction is due for the dividend under the Corporation Tax Acts.
However, recent disclosures under the disclosure of tax avoidance scheme rules have indicated that arrangements involving derecognition continue to be developed.
Finance (No 2) Bill 2010 therefore includes legislation to address these schemes.
In addition, provisions in Finance Bill 2011 will recast the legislation so that it operates as a general rule that derecognition in the accounts is not followed for the purposes of the loan relationships and derivative contracts rules in CTA 2009, Parts 5 to 7.
It is not the intention, however, that these changes should have an inappropriate impact on normal trading transactions, hedging arrangements, or conduit loans or other pass-through arrangements, in which GAAP may require derecognition of certain amounts.
HMRC acknowledge that certain transactions will be affected by these proposals and therefore invite comments on the extent to which they should be excluded from the amended rule.
The department also acknowledges that any changes to the tax rules on derecognition need to take into account the International Accounting Standards Board’s proposals in exposure draft ED/2009/3 for new guidance on when a financial asset is to be removed from a company’s financial statements.
Comments on the draft legislation should be emailed to Tony Sadler or Richard Rogers by 17 September.
