(1) This Chapter makes further provision about the credits and debits to be brought into account for the purposes of this Part.
(2) In particular, it—
(a) provides for adjustments on a change of accounting basis (see sections 613 to 615),
(b) makes provision in relation to certain embedded derivatives (see sections 616 to 618),
(c) makes provision about partnerships involving companies (see sections 619 to 621),
(d) makes provision about contracts ceasing to be derivative contracts (see section 622), and
(e) makes provision in relation to some gilt-edged securities (see section 623).
(1) Sections 614 and 615 (adjustments on change of accounting basis) apply if—
(a) a company changes, from one period of account or accounting period to the next, the basis of accounting on which credits and debits relating to its derivative contracts or any of them are calculated for the purposes of this Part,
(b) the change of basis—
(i) is made in order to comply with a provision made by or under this Part requiring those credits and debits to be determined on a particular basis of accounting, or
(ii) results from a change of the company's accounting policy,
(c) the change of basis is not made in order to comply with amending legislation not applicable to the previous period,
(d) the old basis accorded with the law or practice applicable in relation to the period before the change, and
(e) the new basis accords with the law and practice applicable to the period after the change.
(2) In this section and those sections—
(a) the first of the periods mentioned in subsection (1) is referred to as “the earlier period”, and
(b) the next is referred to as “the later period”.
(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(4) If an election is made under section 416, this section and sections 614 and 615 apply as if there were a change of accounting policy consisting of the company treating the assets referred to in section 416(1)(c) as mentioned in section 585(1) as from the date the election has effect.
614 Change of basis of accounting involving change of value
(1) If there is a difference between—
(a) the tax-adjusted carrying value of a derivative contract at the end of the earlier period, and
(b) the tax-adjusted carrying value of that derivative contract at the beginning of the later period,
a credit or debit (as the case may be) of an amount equal to the difference must be brought into account for the purposes of this Part for the later period in the same way as a credit or debit which is brought into account in determining the company's profit or loss for that period in accordance with generally accepted accounting practice.
(2) This section does not apply so far as the credit or debit falls to be brought into account apart from this section.
615 Change of accounting policy after ceasing to be party to derivative contract
(1) This section applies if—
(a) the company has ceased to be a party to a derivative contract in an accounting period (“the cessation period”),
(b) section 607A (company is not, or has ceased to be, party to derivative contract) applied to the cessation, and
(c) there is a difference between the amount outstanding in respect of the derivative contract (see subsection (5))—
(i) at the end of the earlier period, and
(ii) at the beginning of the later period.
(2) A credit or debit (as the case may be) of an amount equal to the difference must be brought into account for the purposes of this Part for the later period in the same way as a credit or debit which is brought into account in determining the company's profit or loss for that period in accordance with generally accepted accounting practice.
(4) Subsection (2) does not apply so far as the credit or debit falls to be brought into account apart from this section.
(5) In this section “the amount outstanding in respect of the derivative contract” means—
(a) so much of the recognised deferred income or recognised deferred loss from the derivative contract as has not been represented by credits or debits brought into account in accordance with this Part in respect of the contract, and
(b) any amounts relating to the matters mentioned in section 594A(1) in respect of the derivative contract that have in accordance with generally accepted accounting practice been recognised in the company's accounts as items of other comprehensive income and not transferred to become items of profit or loss.
(6) In subsection (5)—
“recognised deferred income”, in relation to a derivative contract, means the amount recognised in the company's balance sheet in accordance with generally accepted accounting practice as deferred income in respect of the profits which arose from the contract or a related transaction in the cessation period, and
“recognised deferred loss”, in relation to a derivative contract, means the amount so recognised as deferred loss in respect of the losses which so arose.
(7) In determining what amounts fall within subsection (5)(b) at the beginning or end of a period, it is to be assumed that the accounting policy applied in drawing up the company's accounts for the period was also applied in previous periods.
(8) But if the company's accounts for the period are in accordance with generally accepted accounting practice drawn up on an assumption as to the accounting policy in previous periods which differs from that mentioned in subsection (7), that different assumption applies in determining what amounts fall within subsection (5)(b) at the beginning or end of the period.
(1) This section applies if—
(a) a company is treated as a party to a relevant contract under section 584(2)(a) or 586(2) (“the embedded derivative”),
(b) the embedded derivative is a derivative contract which meets the condition in section 579(1)(a) (contract treated for accounting purposes as derivative),
(c) section 592 (embedded derivatives treated as meeting condition in section 591 etc) does not apply in relation to the embedded derivative, and
(d) regulation 9 of the Disregard Regulations (interest rate contracts) does not apply to the embedded derivative.
(2) If this section applies—
(a) sections 573 and 574 (trading credits and debits to be brought into account under Part 3 and non-trading credits and debits to be brought into account under Part 5) do not apply in relation to the embedded derivative, and
(b) subsection (3) or subsections (4) to (6) apply in relation to the original contract, depending on whether that contract is a hybrid derivative or a contract within section 586(1).
(3) If the original contract is a hybrid derivative, profits and losses are to be calculated for the purposes of this Part as if that contract—
(a) were not one where the rights and liabilities are treated for accounting purposes as divided as mentioned in section 584(1) (hybrid derivatives with embedded derivatives), and
(b) were not one in relation to which a fair value basis of accounting is used.
(4) If the original contract is a contract within section 586(1), profits and losses are to be brought into account for the purposes of the Corporation Tax Acts in relation to that contract as if that contract—
(a) were not one where the rights and liabilities are treated for accounting purposes as divided as mentioned in section 586(1) (other contracts with embedded derivatives), and
(b) were not one in relation to which a fair value basis of accounting is used.
(5) Accordingly, this Part does not apply to the original contract (except for the purposes of this section), but section 46 applies to that contract as if fair value accounting were not generally accepted accounting practice in relation to the company.
(6) Subsections (4) and (5) apply despite section 699(1) (priority of this Part for corporation tax purposes).
(7) In this section—
“the Disregard Regulations” means the Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) Regulations 2004 (S.I. 2004/3256), and
“the original contract” means—
the hybrid derivative as a result of which the company falls to be treated under section 584(2) (hybrid derivatives with embedded derivatives) as a party to the embedded derivative, or
the contract within section 586(1) (other contracts with embedded derivatives) as a result of which the company falls to be treated under section 586(2) as a party to the embedded derivative.
(1) A company may elect that section 616 is not to apply in relation to its contracts.
(2) But such an election does not apply to a contract if—
(a) the contract is a contract of long-term insurance, or
(b) the underlying subject matter of the embedded derivative is, or includes, commodities.
(3) An election under this section—
(a) must be made before the end of the first applicable accounting period of the company, and
(b) is irrevocable.
(4) In subsection (3) “the first applicable accounting period” means the first accounting period in which the conditions in section 616(1) are met.
(5) Section 618 makes further provision about elections under this section.
618 Elections under section 617: groups of companies
(1) If—
(a) a company makes an election under section 617 in relation to its contracts, and
(b) another company, which is a member of the same group as the company making the election, is a party to a contract to which the election applies,
the other company is treated, in relation to that contract, as if it had also made such an election.
(2) If—
(a) a company (“the electing company”) makes an election under section 617 in relation to its contracts,
(b) another company (“the transferee”) becomes a party to a contract to which section 584 (hybrid derivatives with embedded derivatives) or section 586 (other contracts with embedded derivatives) applies, in place of the electing company (whether before or after the election is made), and
(c) the transferee is a member of the same group of companies as the electing company at the time of the transfer,
the transferee is treated, in relation to the contract mentioned in paragraph (b), as if it had also made such an election.
(3) If—
(a) a company (“A”) is treated under section 584 or 586 as a party to a relevant contract in relation to which section 616(1) applies,
(b) another company (“B”) becomes a party to that contract in place of A,
(c) A and B are members of the same group of companies when B becomes a party to the contract, and
(d) section 616(1) does not apply in relation to B's other relevant contracts because of an election under section 617 (whenever made),
subsection (4) applies, unless A, subsequent to B's becoming a party to the contract, makes such an election.
(4) B is treated, in relation to the contract mentioned in subsection (3)(b), as if section 616(1) applied in relation to it.
(5) In this section, references to a company being a member of the same group of companies are to be read in accordance with section 170 of TCGA 1992 (interpretation of sections 171 to 181 of that Act: groups).
(1) This section applies if—
(a) a trade or business is carried on by a firm,
(b) any of the partners in the firm is a company (a “company partner”), and
(c) the firm is a party to a contract which is a derivative contract or would be a derivative contract if the firm were a company.
(2) No credits or debits may be brought into account in accordance with this Part in respect of the contract in calculating the profits and losses of the trade or business for corporation tax purposes under section 1259 (calculation of firm's profits and losses).
(3) Instead, each company partner must bring into account in accordance with this Part credits and debits in respect of the contract for each of its accounting periods in which the conditions in subsection (1) are met.
(4) Sections 620 (determination of credits and debits by company partners) and 621 (company partners using fair value accounting) contain special rules about the credits and debits to be brought into account under subsection (3).
(5) In sections 620 and 621 “company partner” has the same meaning as in this section.
620 Determination of credits and debits by company partners
(1) The credits and debits to be brought into account under section 619(3) are to be determined separately for each company partner as follows.
(2) The contract entered into or acquired by the firm is treated as if it were instead entered into or acquired by the company partner for the purposes of the trade or business which the company partner carries on.
(3) Anything done by or in relation to the firm in connection with the contract is treated as done by or in relation to the company partner.
(4) So far as exchange gains or losses arising from the contract are recognised in the firm's—
(a) statement of total recognised gains and losses,
(b) statement of recognised income and expense,
(c) statement of changes in equity, or
(d) statement of income and retained earnings,
they are treated as if they had been recognised in the corresponding statement of the company partner.
(5) The credits and debits in the case of each company partner are the partner's appropriate share of the total credits and debits determined in accordance with subsections (2) to (4).
(6) A company partner's “appropriate share” is the share which would be apportioned to it on the assumption in subsection (7).
(7) The assumption is that the total credits and debits determined in accordance with subsections (2) to (4) are apportioned between the partners in the shares in which any profit or loss would be apportioned between them in accordance with the firm's profit-sharing arrangements.
(1) This section applies if a company partner uses fair value accounting in relation to its interest in the firm.
(2) The credits and debits to be brought into account by the company partner under section 619(3) are to be determined on the basis of fair value accounting.
(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 this Part as if it had disposed of the contract in a related transaction at 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.
(4) For the purposes of this section, the “notional carrying value” of the contract at the relevant time is the amount which would have been the tax-adjusted carrying value of the contract based on the accounts of the company if a period of account had ended immediately before that time.
(5) See also section 662 (chargeable gains provision for contracts ceasing to be derivative contracts).
623 Index-linked gilt-edged securities with embedded contracts for differences
(1) This section applies to a derivative contract of a company for an accounting period if each of conditions A to D 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.
(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 creditor relationship is an index-linked gilt-edged security.
(5) Condition D is that the credits and debits which fall to be brought into account for the accounting period for the purposes of Part 5 (loan relationships) in respect of the host contract are non-trading credits and non-trading debits.
(6) The credits and debits which would fall to be brought into account in accordance with this Part in respect of the derivative contract for the accounting period apart from this section may not be so brought into account.
(7) 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 embedded derivatives) because of the creditor relationship mentioned in subsection (2), and
“index-linked gilt-edged security” has the same meaning as in Part 5 (see section 399(4)).
(1) This Chapter makes provision—
(a) about continuity of treatment in some cases in which a company replaces a member of the same group of companies as a party to a derivative contract, and
(b) about cases in which the company ceases to be a member of the group.
(2) For the meaning of references in this Chapter to a company replacing another as a party to a derivative contract, see section 627.
(3) In this Chapter, references to a company being a member of a group of companies are to be read in accordance with section 170 of TCGA 1992 (interpretation of sections 171 to 181 of that Act: groups).
(4) For modifications of this Chapter for insurance companies, see section 636.
625 Group member replacing another as party to derivative contract
(1) This section applies if—
(a) there is a transaction within section 626(2) or a series of transactions within section 626(3),
(b) as a result one of the companies involved (“the transferee”) directly or indirectly replaces the other (“the transferor”) as a party to a derivative contract.
(2) The credits and debits to be brought into account in accordance with this Part in respect of the derivative contract are determined in accordance with subsections (3) to (5).
(3) For the accounting period in which the transaction or, as the case may be, the first of the transactions takes place, the transferor is treated as having entered into that transaction for consideration of an amount equal to the notional carrying value of the contract (see subsection (6)).
(4) For any accounting period in which the transferee is a party to the contract, it is treated as if it had acquired the contract for consideration of an amount equal to its notional carrying value.
(5) If a discount arises in respect of the transaction or series of transactions, the consideration is increased for the purposes of subsection (3) (but not subsection (4)) by the amount of the discount.
(6) For the purposes of this section—
(a) “discount” has same meaning as in section 480 (relevant non-lending relationships involving discounts), and
(b) the notional carrying value of a contract is the amount which would have been its tax-adjusted carrying value based on the accounts of the transferor if a period of account had ended immediately before the date when the transferor ceased to be a party to the contract.
(7) Part 4 of TIOPA 2010 (provision not at arm's length) does not apply in relation to the amounts in respect of which credits or debits are to be brought into account under this section.
(8) This section is subject to sections 628 (transferor using fair value accounting) and 629 (tax avoidance).
(1) This section applies for the purposes of section 625(1)(a).
(2) A transaction is within this subsection if it is a related transaction between two companies which are—
(a) members of the same group, and
(b) within the charge to corporation tax in respect of that transaction.
(3) A series of transactions is within this subsection if it is a series of transactions having the same effect as a related transaction between two companies each of which—
(a) has been a member of the same group at any time in the course of that series of transactions, and
(b) would be within the charge to corporation tax in respect of such a related transaction.
627 Meaning of company replacing another as party to derivative contract
(1) References in this Chapter to one company (“A”) replacing another company (“B”) as a party to a derivative contract include references to A becoming a party to a derivative contract which—
(a) confers rights within subsection (2),
(b) imposes liabilities within subsection (2), or
(c) both confers such rights and imposes such liabilities.
(2) Rights or liabilities are within this subsection if they are equivalent to those of B under a derivative contract to which B has previously ceased to be a party.
(1) This section applies instead of section 625 if, in a case where that section would otherwise apply, the transferor uses fair value accounting as respects the derivative contract.
(2) The amount which is to be brought into account by the transferor in respect of—
(a) the transaction mentioned in that section, or
(b) the series of transactions mentioned in that section taken together,
is the fair value of the derivative contract as at the date of transfer to the transferee.
(3) For any accounting period in which the transferee is a party to the contract, for the purpose of determining the credits and debits to be brought into account in respect of the contract in accordance with this Part, the transferee is treated as if it had acquired the contract for consideration of an amount equal to the fair value of the contract as at the date of transfer to it.
(4) If a discount arises in respect of the transaction or series of transactions, the amount to be brought into account under subsection (2) is increased by the amount of the discount.
(5) In this section—
“discount” has the same meaning as in section 480 (relevant non-lending relationships involving discounts), and
“the transferor” and “the transferee” have the same meaning as in section 625.
(1) Sections 631 and 632 apply if—
(a) section 625 (group member replacing another as party to derivative contract) applies because of a transaction or series of transactions within section 626(2) or (3), and
(b) before the end of the relevant 6 year period and while still a party to the relevant derivative contract, the transferee ceases to be a member of the relevant group.
(2) But the transferee is not to be treated for the purposes of this section and sections 631 and 632 as having left the relevant group if—
(a) rights and liabilities under a derivative contract are transferred in the course of a transfer or merger in relation to which Chapter 9 (European cross-border transfers of business) or Chapter 10 (European cross-border mergers) applies, and
(b) the transferee ceases to be a member of the relevant group in consequence of the transfer or merger.
(3) In a case where subsection (2) applies, if the transferee becomes a member of another group in consequence of the transfer or merger, it is to be treated for the purposes of this section and sections 631 and 632 as if the relevant group and the other group were the same.
(4) In this section and sections 631 and 632—
“the relevant 6 year period” means the period of 6 years following—
in a case where section 625 applies because of a transaction within section 626(2) (“case A”), that transaction, or
in a case where section 625 applies because of a series of transactions within section 626(3) (“case B”), the last transaction of that series,
“the relevant derivative contract” means the derivative contract mentioned in section 625(1),
“the relevant group” means—
in case A, the group mentioned in section 626(2),
in case B, the group mentioned in section 626(3), and
“the transferee” has the same meaning as in section 625.
631 Transferee leaving group otherwise than because of exempt distribution
(1) This section applies if—
(a) the transferee ceases to be a member of the relevant group, and
(b) it does not so cease just because of a distribution which is exempt as a result of section 1075 of CTA 2010 (exempt distributions).
(2) ... This Part applies as if—
(a) the transferee had assigned its rights and liabilities under the relevant derivative contract immediately before so ceasing,
(b) the assignment had been for consideration of an amount equal to their fair value at that time, and
(c) the transferee had immediately reacquired them for consideration of the same amount.
(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
632 Transferee leaving group because of exempt distribution
(1) This section applies if—
(a) the transferee ceases to be a member of the relevant group just because of a distribution which is exempt as a result of section 1075 of CTA 2010 (exempt distributions), and
(b) there is a chargeable payment within the meaning of section 1088(1) of CTA 2010 (chargeable payments connected with exempt distributions) within 5 years after the making of the distribution.
(2) ... This Part applies as if—
(a) the transferee had assigned its rights and liabilities under the relevant derivative contract immediately before that chargeable payment was made,
(b) the assignment had been for consideration of an amount equal to their fair value immediately before the transferee ceased to be a member of the relevant group, and
(c) the transferee had immediately reacquired them for consideration of the same amount.
(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For the purposes of this Part, activities carried on by a company in the course of any mutual trading are treated as not constituting the whole or any part of a trade.
(1) For the purposes of this Part, activities carried on by a company in the course of—
(a) any mutual insurance or other mutual business which is not life assurance business, ...
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
are treated as not constituting the whole or any part of a trade.
(2) In the case of activities carried on by a company in the course of any basic life assurance and general annuity business, provision corresponding to that made by subsection (1) is made by section 88 of FA 2012 for the purpose of applying the I - E rules.
635 Creditor relationships: embedded derivatives which are options
(1) This section applies if in any accounting period—
(a) a company is a party to a creditor relationship for the purposes of its basic life assurance and general annuity business, and
(b) that creditor relationship is one in relation to which sections 415 and 585 (which both apply to loan relationships with embedded derivatives) would have effect but for the fact that the company accounts for the creditor relationship at fair value through profit and loss.
(2) For the purpose of applying the I - E rules, this Part and Part 5 (loan relationships) have effect for that accounting period as they would if the creditor relationship were one in relation to which those sections have effect.
(1) Chapter 5 (continuity of treatment on transfers within groups) has effect in relation to insurance companies with the following modifications.
(2) Section 625(1)(a) (which sets out one of the conditions for that section to apply) has effect as if for “section 626(2)” there were substituted “section 626(2), (2A) or (2B)”.
(3) Section 626 (transactions to which section 625 applies) has effect as if after subsection (2) there were inserted—
(2A) A transaction is within this subsection if it is a transfer between two companies of business consisting of the effecting or carrying out of contracts of long-term insurance which has effect under an insurance business transfer scheme.
(2B) A transaction is within this subsection if it is a transfer between two companies which is a qualifying overseas transfer.
(2C) In subsection (2B) “qualifying overseas transfer” means so much of a transfer of the whole or any part of the business of an overseas life insurance company carried on through a permanent establishment in the United Kingdom as takes place in accordance with an authorisation granted outside the United Kingdom for the purposes of Article 39 of Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II).
(4) Section 625 (group member replacing another as party to derivative contract) does not apply as a result of a transaction or series of transactions within section 626(2) or (3) in relation to a transfer of an asset, or of rights or duties under or an interest in an asset, if, immediately before or after the transfer, the asset was held for the purposes of a company's long-term business (but, in the case of an overseas life insurance company, ignoring assets which are not UK assets (within the meaning of section 117 of FA 2012)).
(5) Section 625 does not apply as a result of a transaction within section 626(2A) or (2B) in relation to a transfer of an asset, or of rights or duties under or an interest in an asset, if the asset—
(a) was within one of the applicable categories immediately before the transfer, and
(b) is not within that category immediately after it.
(5A) For the purposes of subsection (5)(a) “the applicable categories” means—
(a) in the case of a UK life insurance company, the long-term business categories or a category of assets which are not held for the purposes of its long-term business, and
(b) in the case of an overseas life insurance company, the UK long-term business categories, a category of UK assets which are not held for the purposes of its long-term business or a category of assets which are held by it but which are not UK assets.
(6) Subsection (7) applies for the purposes of subsection (5) if one of the companies is an overseas life insurance company.
(7) An asset is taken to be within the same category both immediately before the transfer and immediately after it if the asset—
(a) was within one category immediately before the transfer, and
(b) is within the corresponding category immediately after it.
(8) For the purposes of this section—
(a) “the long-term business categories” has the same meaning as in section 116 of FA 2012, and “the UK long-term business categories” and “UK assets” have the same meanings as in section 117 of FA 2012, and
(b) section 122 of FA 2012 applies as it applies for the purposes of Chapter 8 of Part 2 of that Act.
637 Investment trusts: profits or losses of a capital nature
(1) Profits or losses of a capital nature arising to an investment trust from a derivative contract may not be brought into account as credits or debits in accordance with this Part.
(2) For the purposes of this section, “profits or losses of a capital nature” means profits or losses which—
(a) are accounted for through the capital column of the income statement in accordance with the Statement of Recommended Practice, or
(b) would have been so accounted for if that Statement had been applied correctly.
(3) “The Statement of Recommended Practice”, in relation to an accounting period for which it is required or permitted to be used, means—
(a) the Statement of Recommended Practice relating to Investment Trust Companies, issued by the Association of Investment Trust Companies in January 2003, as from time to time modified, amended or revised, or
(b) any subsequent Statement of Recommended Practice relating to investment trusts, as from time to time modified, amended or revised.
(4) The Treasury may by order amend the definition of “profits or losses of a capital nature” in subsection (2), so far as it applies in relation to an investment trust which prepares accounts in accordance with international accounting standards.
638 Venture capital trusts: profits or losses of a capital nature
(1) Profits or losses of a capital nature arising to a venture capital trust from a derivative contract may not be brought into account as credits or debits in accordance with this Part.
(2) For the purposes of this section, “profits or losses of a capital nature” means profits or losses which—
(a) are accounted for through the capital column of the income statement in accordance with the Statement of Recommended Practice, or
(b) would have been so accounted for if the venture capital trust had been an investment trust and that Statement had been applied correctly.
(3) In this section “the Statement of Recommended Practice” has the meaning given by section 637(3) (investment trusts: profits or losses of a capital nature).
(4) The Treasury may by order amend the definition of “profits or losses of a capital nature” in subsection (2), so far as it applies in relation to a venture capital trust which prepares accounts in accordance with international accounting standards.
(1) This Chapter makes provision about cases in which—
(a) credits and debits are not to be brought into account in accordance with section 574 (non-trading credits and debits to be brought into account under Part 5: loan relationships) (see sections 640 and 643 to 650), but
(b) instead profits arising to a company from its derivative contracts are chargeable to corporation tax as chargeable gains (see sections 641 to 650).
(2) This Chapter also makes provision about cases in which—
(a) credits and debits are not to be brought into account in accordance with section 573 (trading credits and debits to be brought into account under Part 3: trading income) or section 574 (non-trading credits and debits to be brought into account under Part 5: loan relationships) (see section 651), but
(b) instead provisions relating to corporation tax on chargeable gains apply in relation to derivative contracts (see sections 652 to 658).
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 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 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.
(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).
641 Derivative contracts to be taxed on a chargeable gains basis
(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 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
(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 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.
(6) For a case in which this section does not apply, see section 642.
(7) See also section 663 (carry back of net losses on derivative contracts to which this section applies).
(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 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 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.
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 , C and D are met.
(2) Condition A is that the underlying subject matter of the derivative contract 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 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.
(4A) Condition D is that no two or more of the parties to the derivative contract are connected persons.
(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
(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—
(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.
(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
(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.
(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.
(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 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).
(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 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 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 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.
(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
(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.
(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 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
(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
(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.
(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.
(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 qualifying corporate bond.
(9) See also section 672 (treatment of net gains and losses on disposal of certain embedded derivatives).
(1) This section applies for the purposes of section 648.
(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—
(a) the value of the assets which are the underlying subject matter of the contract, or
(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.
(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 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 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.
(1) This section applies to a derivative contract of a company for an accounting period if each of conditions A to H 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.
(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 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) Condition G is that no two or more of the parties to the derivative contract are connected persons.
(9) Condition H is that the securing of a tax advantage is neither the main purpose, nor one of the main purposes, for which the company is a party to the derivative contract.
“Tax advantage” has the meaning given by section 1139 of CTA 2010.
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 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
(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 those sections.