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Statutory Instruments
INCOME TAX
Made
9th December 2004
Laid before the House of Commons
10th December 2004
Coming into force
1st January 2005
1.—(1) These Regulations may be cited as the Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) Regulations 2004 and shall come into force on 1st January 2005.
(2) These Regulations have effect in relation to periods of account beginning on or after 1st January 2005.
Commencement Information
I1Reg. 1 in force at 1.1.2005, see reg. 1(1)
2.—(1) In these Regulations—
“derivative contract” has the same meaning as in Schedule 26 to the Finance Act 2002;
[F1“exchange gain or loss” has the same meaning as in paragraph 54 of Schedule 26 to the Finance Act 2002;]
“fair value accounting” has the meaning given in section 103 of the Finance Act 1996(3);
“fair value profit or loss” means the profit or loss brought into account in relation to a derivative contract or an asset or liability representing a loan relationship where for the period in question fair value accounting is used, and where fair value accounting is used in relation to only part of a contract it means the profit or loss brought into account in relation to that part;
[F2“loan relationship” has the same meaning as in section 81 of the Finance Act 1996;]
[F2“a paragraph 50A credit or debit” means the credit or debit to be brought into account in accordance with paragraph 50A of Schedule 26 to the Finance Act 2002;]
[F2“a prior period adjustment credit or debit” means so much of any credit or debit as represents a prior period adjustment taken into account by virtue of paragraph 17B(1)(b) of Schedule 26 to the Finance Act 2002 as a result of a change of accounting basis;]
“underlying subject matter” has the same meaning as in Schedule 26 to the Finance Act 2002.
(2) In these Regulations—
“for accounting purposes” means for the purposes of accounts drawn up in accordance with generally accepted accounting practice;
“generally accepted accounting practice” has the meaning given in section 50 of the Finance Act 2004(4); and
“amortised cost”, “designated”, “effective hedge”, “effective interest method”, “firm commitment”, “forecast transaction”, “foreign operation” and “net investment in a foreign operation” have the same meaning as for accounting purposes.
(3) In these Regulations any reference to an asset which is a ship or aircraft includes a reference to a contract—
(a)to which section 67 of the Capital Allowances Act 2001(5) applies; and
(b)which relates to plant or machinery which is a ship or aircraft.
(4) In these Regulations—
(a)any reference to a hedging instrument includes a reference to part of an instrument; and
(b)any reference to a hedged item includes a reference to part of a hedged item.
(5) For the purposes of these Regulations, a company has a hedging relationship between a derivative contract or a liability representing a loan relationship on the one hand (“the hedging instrument”) and an asset, liability, receipt or expense on the other (“the hedged item”) if and to the extent that—
(a)the hedging instrument and the hedged item are designated by the company as a hedge; or
(b)in any other case the hedging instrument is intended to act as a hedge of—
(i)the exposure to changes in fair value of a hedged item which is a recognised asset or liability or an unrecognised firm commitment or an identified portion of such an asset, liability or commitment that is attributable to a particular risk and could affect profit or loss of the company;
(ii)the exposure to variability in cash flows that is attributable to a particular risk associated with a hedged item that is a recognised asset or liability or a forecast transaction and could affect profit or loss of the company; or
(iii)a net investment in a foreign operation of the company.
Textual Amendments
F1Words in reg. 2(1) substituted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 3(a)
F2Words in reg. 2(1) inserted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 3(b)
Commencement Information
I2Reg. 2 in force at 1.1.2005, see reg. 1(1)
3.—(1) For the purposes of section 84A(3A) of the Finance Act 1996 there is prescribed an exchange gain or loss arising to a company in an accounting period in relation to a liability representing a loan relationship of the company which is matched with the whole or part of any shares, ships or aircraft.
[F3(1A) For the purposes of paragraph (1) a liability representing a loan relationship does not include any liability representing a relationship within section 100(1) of the Finance Act 1996.]
(2) This regulation does not apply if movements in the fair value [F4, or profits or losses arising on the disposal,] of any shares, ships or aircraft which are an asset falling within regulation 3(1) are brought into account by the company in computing, for the purposes of corporation tax, the profits of a trade carried on by it which consists of or includes dealing in shares, ships or aircraft.
(3) [F5Shares, ships or aircraft are matched to the greatest possible extent with—
the liability representing the loan relationship designated as a hedge if condition 1 is satisfied;
subject to paragraph (a), the liability representing the loan relationship referred to in condition 2 if that condition is satisfied;]
The condition is that for the accounting period, the shares, ships or aircraft are a hedged item under a designated hedge of exchange rate risk in which the liability is the hedging instrument.
The condition is that the currency in which the liability is expressed is such that the company [F9intends], by entering into [F10and continuing to be subject to] that liability, F11... to eliminate or substantially reduce the economic risk of holding the asset, or part of the asset, which is attributable to fluctuations in exchange rates.
(4) If [F12condition 2] applies, a liability is matched with an asset only to the extent that the carrying value of the liability at the time when the liability is entered into [F13or, if later, when the asset is acquired] does not exceed the unmatched carrying value of the asset at that time.
(5) For the purposes of section 84A(3A) of the Finance Act 1996 there is prescribed an exchange gain or loss arising to a company in an accounting period in relation to an asset representing a loan relationship of the company which is matched with the whole or part of any share capital of the company.
(6) An asset is matched with share capital [F14in particular where] for the accounting period of the company immediately preceding the first accounting period to which these Regulations apply—
(a)exchange gains and losses on the asset were taken to a reserve; and
(b)set off there against exchange gains and losses on the share capital.
(7) In this regulation—
“carrying value” means, in relation to a liability, the [F15relevant value] of that liability; and
“unmatched carrying value” means, in relation to an asset, an amount equal to the value as shown in the company’s accounts to the extent that that amount has not previously been matched in accordance with this regulation or regulation 4.
Textual Amendments
F3Reg. 3(1A) inserted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 4(2)
F4Words in reg. 3(2) inserted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 4(3)
F5Words in reg. 3(3) substituted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 4(4)(a)
F6Words in reg. 3(3) omitted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by virtue of The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 4(4)(b)
F7Reg. 3(3): Condition 2 renumbered as Condition 1 (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 4(4)(d)(i)
F8Reg. 3(3): Condition 3 renumbered as Condition 2 (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 4(4)(d)(ii)
F9Word in reg. 3(3) substituted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 4(4)(c)(i)
F10Words in reg. 3(3) inserted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 4(4)(c)(ii)
F11Words in reg. 3(3) omitted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by virtue of The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 4(4)(c)(iii)
F12Words in reg. 3(4) substituted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 4(5)(a)
F13Words in reg. 3(4) inserted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 4(5)(b)
F14Words in reg. 3(6) substituted (29.12.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2005 (S.I. 2005/3374), regs. 1(1), 4
F15Words in reg. 3(7) substituted (29.12.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2005 (S.I. 2005/3374), regs. 1(1), 3
Commencement Information
I3Reg. 3 in force at 1.1.2005, see reg. 1(1)
4.—(1) For the purposes of paragraph 16(3A) and 17C(1)(a) of Schedule 26 to the Finance Act 2002 there is prescribed an exchange gain or loss arising to a company in an accounting period in relation to a derivative contract of the company which is matched with the whole or part of any shares, ships or aircraft.
(2) This regulation does not apply if movements in the fair value [F16, or profits or losses arising on the disposal,] of any shares, ships or aircraft which are an asset falling within regulation 4(1) are brought into account by the company in computing, for the purposes of corporation tax, the profits of a trade carried on by it which consists of or includes dealing in shares, ships or aircraft.
(3) [F17Shares, ships or aircraft are matched to the greatest possible extent with—
the derivative contract designated as a hedge if condition 1 is satisfied;
subject to paragraph (a), the derivative contract referred to in condition 2 if that condition is satisfied.]
The condition is that for the accounting period, the shares, ships or aircraft are a hedged item under a designated hedge of exchange rate risk in which the derivative contract is the hedging instrument.
The condition is that the underlying subject matter of the derivative contract is such that the company [F21intends], by entering into [F22and continuing to be party to] that contract, F23... to eliminate or substantially reduce the economic risk of holding the asset, or part of the asset, which is attributable to fluctuations in exchange rates.
(4) If [F24condition 2] applies, a derivative contract is matched with an asset only to the extent that the [F25value of the obligation under] the derivative contract at the time when the contract is entered into [F26or, if later, when the asset is acquired] does not exceed the unmatched carrying value of the asset at that time.
[F27(4A) For the purposes of paragraph 16(3A) of Schedule 26 to the Finance Act 2002 there is prescribed an exchange gain or loss arising to a company in an accounting period in relation to a derivative contract of the company which is matched with the whole or part of any share capital of the company.
(4B) A derivative contract is matched with share capital in particular where for the accounting period of the company immediately preceding the first accounting period beginning on or after 1st January 2005—
(a)exchange gains and losses on the derivative contract were taken to a reserve; and
(b)set off there against exchange gains and losses on the share capital.]
(5) In this regulation—
F28...
“unmatched carrying value” means, in relation to an asset, an amount equal to the [F29relevant value] to the extent that that amount has not previously been matched in accordance with this regulation or regulation 3.
[F30“the value of the obligation under the derivative contract” means the value of the obligation of the company to pay in exchange for one currency an amount of a second currency and includes any notional obligation to pay an amount of currency in respect of a contract for differences.]
Textual Amendments
F16Words in reg. 4(2) inserted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 5(2)
F17Words in reg. 4(3) substituted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 5(3)(a)
F18Words in reg. 4(3) omitted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by virtue of The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 5(3)(b)
F19Reg. 4(3): Condition 2 renumbered as Condition 1 (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 5(3)(d)(i)
F20Reg. 4(3): Condition 3 renumbered as Condition 2 (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 5(3)(d)(ii)
F21Word in reg. 4(3) substituted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 5(3)(c)(i)
F22Words in reg. 4(3) inserted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 5(3)(c)(ii)
F23Words in reg. 4(3) omitted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by virtue of The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 5(3)(c)(iii)
F24Words in reg. 4(4) substituted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 5(4)(a)
F25Words in reg. 4(4) substituted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 5(4)(b)
F26Words in reg. 4(4) inserted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 5(4)(c)
F27Reg. 4(4A)(4B) inserted (29.12.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2005 (S.I. 2005/3374), regs. 1(1), 5
F28Words in reg. 4(5) omitted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by virtue of The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 5(5)(a)
F29Words in reg. 4(5) substituted (29.12.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2005 (S.I. 2005/3374), regs. 1(1), 3
F30Words in reg. 4(5) inserted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 5(5)(b)
Commencement Information
I4Reg. 4 in force at 1.1.2005, see reg. 1(1)
4A.—(1) For the purposes of regulations 3(7) and 4(5), “relevant value” means—
(a)the value determined on the basis of accounting used in the prior accounting period in the case specified in paragraph (2), and
(b)the value shown in the accounts of the company in any other case.
(2) The case specified is where—
(a)an asset is matched in accordance with regulation 3(3)(b) or 4(3)(b);
(b)in the prior accounting period the exchange gains or losses in relation to that asset were taken to a reserve and set off there against exchange gains or losses in relation to the liability or derivative contract with which the asset is matched; and
(c)the value of the asset shown in the company’s accounts was, in accordance with generally accepted accounting practice, determined—
(i)on an historic cost basis of accounting in the first accounting period beginning on or after 1st January 2005, and
(ii)on a different basis of accounting in the prior accounting period.
(3) In this regulation the “prior accounting period” means the accounting period of the company immediately preceding its first accounting period beginning on or after 1st January 2005.]
Textual Amendments
F31Reg. 4A inserted (29.12.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2005 (S.I. 2005/3374), regs. 1(1), 6
5.—(1) Where in any accounting period—
(a)a company holds more than one asset in relation to which there are amounts of exchange gains and losses falling within regulations 3 or 4; and
(b)the currency—
(i)in which the assets are denominated and the liability [F32mentioned in regulation 3(1)] expressed; or
(ii)which is the underlying subject matter of the derivative contract [F33mentioned in regulation 4(1)] ,
is the same currency, F34... [F35the extent to which an asset is matched is determined in accordance with the following rules].
Liabilities and contracts are regarded as matched to the greatest possible extent with assets which are ships or aircraft.]
Subject to Rule 1, liabilities and contracts are regarded as matched to the greatest possible extent with assets on the disposal of which a chargeable gain would accrue [F37if the disposal were made on a date falling more than 12 months after the date of acquisition of the asset].
Subject to Rules 1 and 2, liabilities [F38and contracts] are regarded as matched with assets on a disposal of which no chargeable gain would be treated as accruing by virtue of Part 1 of Schedule 7AC to the Taxation of Chargeable Gains Act 1992(6) F39....
(2) If—
(a)part only of a liability falling within the third condition in regulation 3, or
(b)part only of a contract falling within the third condition in regulation 4,
could reasonably be expected to eliminate or substantially reduce the economic risk of holding the asset which is attributable to fluctuations in exchange rates, the liability or contract is to be treated as being matched with a corresponding amount of value of an asset.
(3) For the purposes of paragraph (1), a currency in which a liability is expressed or which is the underlying subject matter of a derivative contract, is to be treated, if it is not the case, as the same currency in which an asset is denominated if—
(a)borrowing in that currency, or
(b)the obligation to deliver that currency,
could reasonably be expected to eliminate or substantially reduce the economic risk of holding the asset, or part of the asset, which is attributable to fluctuations in exchange rates.
(4) Where regulation 3 or section 84A(3) of the Finance Act 1996 applies to a company in an accounting period in relation to a liability representing a loan relationship there is prescribed, for the purposes of regulation 3 or section 84A(3A) of that Act, an exchange gain or loss treated by virtue of paragraph 6D(2) of Schedule 28AA to the Taxes Act 1988(7) as arising in that accounting period to another company in relation to the same loan relationship.
Textual Amendments
F32Words in reg. 5(1)(b)(i) inserted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 6(2)(a)
F33Words in reg. 5(1)(b)(ii) inserted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 6(2)(b)
F34Words in reg. 5(1)(b) omitted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by virtue of The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 6(2)(c)
F35Words in reg. 5(1) added (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 6(3)
F36Words in reg. 5(1) substituted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 6(4)
F37Words in reg. 5(1) inserted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 6(5)
F38Words in reg. 5(1) inserted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 6(6)(a)
F39Words in reg. 5(1) revoked (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 6(6)(b)
Commencement Information
I5Reg. 5 in force at 1.1.2005, see reg. 1(1)
6.—(1) Regulations 7, 8 and 9 contain specific rules about excluding fair value profits and losses for the purposes of Schedule 26 to the Finance Act 2002.
(2) For the purposes of regulations 7, 8 and 9 it is immaterial that the hedging relationship is not an effective hedge for accounting purposes.
(3) A company may elect that—
(a)regulation 7 shall not apply to its currency contracts which satisfy the conditions contained in regulation [F407(1)]; and
(b)regulation 8 shall not apply to its commodity contracts or debt contracts which satisfy the conditions contained in that regulation.
(4) Any election made under paragraph (3) shall apply to—
(a)all of the currency contracts entered into by the company which satisfy the conditions contained in regulation [F417(1)]; and
(b)all of the commodity contracts or debt contracts entered into by the company which satisfy the conditions contained in regulation 8(1).
(5) [F42Subject to paragraph (5A)] a company may elect that regulation 9 shall not apply to its interest rate contracts which satisfy the conditions contained in that regulation [F43but that regulation 9A shall apply,] and any election under this regulation shall apply to all of the interest rate contracts entered into by the company which satisfy the conditions contained in regulation 9(1).
[F44(5A) An election under paragraph (5) has no effect in relation to interest rate contracts—
(a)where—
(i)the contract or a portion of the contract (“the hedging instrument”) is designated as a hedge in respect of any risks arising in respect of an asset, liability, receipt or expense (“the hedged item”);
(ii)fair value profits or losses arising on the hedged item or in relation to any of the risks arising in respect of the hedged item, or any portion of the hedged item, are not brought into account for the purposes of corporation tax for that period; and
(iii)fair value profits or losses arising on the hedging instrument are not recognised in the company’s statement of recognised gains and losses or statement of changes in equity;
or
(b)where the hedged item is a loan relationship to which section 87(1) of the Finance Act 1996 applies.]
(6) Subject to paragraph [F45(6A) and] (7), an election under paragraph (3) or (5) shall be made [F46before—
(a)1st October 2005 in the case of an election under paragraph (3), or
(b)31st March 2006 in the case of an election under paragraph (5),
and has effect for that accounting period and all subsequent accounting periods unless, in the case of an election under paragraph (3), revoked.]
[F47(6A) In any case where a company—
(a)does not use fair value accounting in relation to its derivative contracts for an accounting period beginning on or after 1st January 2005, and
(b)begins to use fair value accounting in a subsequent accounting period (“the subsequent period”) in relation to contracts to which regulations 7 or 8, or regulation 9 apply and to which it is a party at the start of that period,
an election under paragraph (3) or (5) shall be made before the start of the subsequent period.]
[F48This paragraph does not apply to cases within paragraph (7).]
(7) In any case where a company is not a party to any contracts to which regulations 7 or 8, or regulation 9 apply immediately before the start of the company’s first accounting period to which the Regulations apply, an election [F49under] paragraph (3) or (5) shall be made within 90 days of the company entering into its first contract to which regulation 7 or 8, or regulation 9 applies, as the case may be [F50or, if later, 31st March 2006].
(8) A company may revoke an election under paragraph (3) F51... with effect from the date on which notice is given of it, but contracts entered into before that date shall not be affected.
(9) An election under paragraph (3) F52... shall be made, and may be revoked by the company which made it, by notice in writing to the [F53Her Majesty’s Revenue and Customs].
[F54(9A) An election under paragraph (5) shall be made in writing to Her Majesty’s Revenue and Customs and is irrevocable.]
(10) If—
(a)a company (“the electing company”) makes an election under paragraph (3) or (5) in relation to its contracts;
(b)any other company which is a party to a derivative contract to which the election applies is a member of the same group of companies as the electing company; and
(c)that other company has not made an election under paragraph (3) or (5) in relation to the contract, as the case may be,
then the other company is to be treated as if it had made the election but only in relation to that contract.
(11) Paragraph (10) does not apply if the electing company, or the other company, entered into the contract in the ordinary course of a banking business or a business as a securities house.
(12) If a contract to which regulation 7, 8 or 9 applies is transferred by a company in circumstances to which paragraph 28 of Schedule 26 to the Finance Act 2002(8) would apply but for paragraph 30(9) of that Schedule—
(a)paragraph 30 shall not apply (and accordingly paragraph 28 shall apply) [F55and paragraph 50A(3B) of that Schedule shall be modified in accordance with paragraph (12A)]; and
(b)the transferee company is to be treated as not having made the election under paragraph (3) or (5) as the case may be (“the relevant election”) in relation to that contract, if it has made a relevant election in relation to all of its contracts.
[F56(12A) The modification to paragraph 50A(3B) of Schedule 26 to the Finance Act is as follows—
(a)in paragraph (a) delete “and”;
(b)after paragraph (b) insert—
“, and
(c)regulations 7, 8 and 9 of the Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) Regulations 2004.”.]
(13) If a company (“the electing company”) makes an election under paragraph (3) or (5) in relation to its contracts—
(a)a contract to which the election applies is transferred to another company (“the transferee company”) in circumstances to which paragraph 28 of Schedule 26 to the Finance Act 2002 applies, or
(b)would apply but for paragraph 30 of that Schedule,
and the transferee company has not made an election under paragraph (3) or (5) in relation to the contract as the case may be, then the transferee company is to be treated as if it had made the election but only in relation to that contract.
(14) In this Regulation—
“group of companies” shall be construed in accordance with section 170 of the Taxation of Chargeable Gains Act 1992(10); and
“securities house” means a person—
Textual Amendments
F40Word in reg. 6(3)(a) substituted (29.12.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2005 (S.I. 2005/3374), regs. 1(1), 7(2)
F41Word in reg. 6(4)(a) substituted (29.12.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2005 (S.I. 2005/3374), regs. 1(1), 7(2)
F42Words in reg. 6(5) inserted (29.12.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2005 (S.I. 2005/3374), regs. 1(1), 7(3)(a)
F43Words in reg. 6(5) inserted (29.12.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2005 (S.I. 2005/3374), regs. 1(1), 7(3)(b)
F44Reg. 6(5A) inserted (29.12.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2005 (S.I. 2005/3374), regs. 1(1), 7(4)
F45Words in reg. 6(6) inserted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 7(2)(a)
F46Words in reg. 6(6) substituted (29.12.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2005 (S.I. 2005/3374), regs. 1(1), 7(5)
F47Reg. 6(6A) inserted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 7(3)
F48Words in reg. 6(6A) added (29.12.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2005 (S.I. 2005/3374), regs. 1(1), 7(6)
F49Word in reg. 6(7) substituted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 7(4)
F50Words in reg. 6(7) inserted (29.12.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2005 (S.I. 2005/3374), regs. 1(1), 7(7)
F51Words in reg. 6(8) revoked (29.12.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2005 (S.I. 2005/3374), regs. 1(1), 7(8)
F52Words in reg. 6(9) revoked (29.12.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2005 (S.I. 2005/3374), regs. 1(1), 7(8)
F53Words in reg. 6(9) substituted (29.12.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2005 (S.I. 2005/3374), regs. 1(1), 7(9)
F54Reg. 6(9A) inserted (29.12.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2005 (S.I. 2005/3374), regs. 1(1), 7(10)
F55Words in reg. 6(12)(a) inserted (29.12.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2005 (S.I. 2005/3374), regs. 1(1), 7(11)
F56Reg. 6(12A) inserted (29.12.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2005 (S.I. 2005/3374), regs. 1(1), 7(12)
Commencement Information
I6Reg. 6 in force at 1.1.2005, see reg. 1(1)
7.—[F57(1) For the purposes of paragraph 17C(1)(a) of Schedule 26 to the Finance Act 2002 there is prescribed in relation to a derivative contract whose underlying subject matter consists wholly of currency —
(a)all credits and debits representing the whole or part of a company’s fair value profit or loss in an accounting period if—
(i)there is a hedging relationship between the contract or part of the contract and a forecast transaction or a firm commitment (“the hedged item”) of the company; and
(ii)the hedged item is not one [F58for which fair value profits or losses are brought into account for the purposes of corporation tax];
(b)a company’s paragraph 50A credit or debit in relation to such a contract, if for the accounting period in which the paragraph 50A credit or debit falls to be brought into account sub-paragraph (a) applies to the contract; and
(c)a company’s prior period adjustment credit or debit in relation to such a contract, if for the accounting period in which the prior period adjustment credit or debit falls to be brought into account sub-paragraph (a) applies to the contract,
and the credits and debits mentioned in sub-paragraphs (a) to (c) together make up the regulation 7 fair value profits or losses.]
F59(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(3) Where there is a hedging relationship between part of a currency contract and a hedged item, the part of the [F60regulation 7] fair value profit or loss that is prescribed is the part which bears to the whole the proportion which the value of that part of the contract which is in the hedging relationship bears to the value of the whole of the contract.
[F61(4) Paragraph 16(3) of Schedule 26 to the Finance Act 2002 does not apply to any regulation 7 fair value profit or loss.]
Textual Amendments
F57Reg. 7(1) substituted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 8(2)
F58Words in reg. 7(1)(a)(ii) substituted (29.12.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2005 (S.I. 2005/3374), regs. 1(1), 8
F59Reg. 7(2) omitted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by virtue of The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 8(3)
F60Words in reg. 7(3) inserted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 8(4)
F61Reg. 7(4) inserted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 8(5)
Commencement Information
I7Reg. 7 in force at 1.1.2005, see reg. 1(1)
8.—[F62(1) For the purposes of paragraph 17C(1)(a) of Schedule 26 to the Finance Act 2002 there is prescribed in relation to a commodity contract or debt contract—
(a)all credits and debits representing the whole or part of a company’s fair value profit or loss arising in an accounting period if—
(i)there is a hedging relationship between the contract or part of the contract and a forecast transaction or a firm commitment (“the hedged item”) of the company; and
(ii)the hedged item is not one [F63for which fair value profits or losses are brought into account for the purposes of corporation tax];
(b)a company’s paragraph 50A credit or debit, if for the accounting period in which the paragraph 50A credit or debit falls to be brought into account, sub-paragraph (a) applies to the contract; and
(c)a company’s prior period adjustment credit or debit, if for the accounting period in which the prior period adjustment credit or debit falls to be brought into account, sub-paragraph (a) applies to the contract,
and the credits and debits mentioned in sub-paragraphs (a) to (c) together make up the regulation 8 fair value profits or losses.]
(2) In this regulation—
“a commodity contract” means a derivative contract whose underlying subject matter is commodities unless the contract is an interest rate contract within the meaning of regulation 9(4); and
“a debt contract” means a derivative contract whose underlying subject matter is an asset or liability representing a loan relationship unless the contract is an interest rate contract within the meaning of regulation 9(4).
(3) Where there is a hedging relationship between part of a commodity contract or part of a debt contract as the case may be and a hedged item, the part of the [F64regulation 8] fair value profit or loss that is prescribed is the part which bears to the whole the proportion which the value of that part of the contract which is in the hedging relationship bears to the value of the whole of the contract.
Textual Amendments
F62Reg. 8(1) substituted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 9(2)
F63Words in reg. 8(1)(a)(ii) substituted (29.12.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2005 (S.I. 2005/3374), regs. 1(1), 8
F64Words in reg. 8(3) inserted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 9(3)
Commencement Information
I8Reg. 8 in force at 1.1.2005, see reg. 1(1)
9.—(1) For the purposes of paragraph 17C(1)(a) of Schedule 26 to the Finance Act 2002 there is prescribed all credits and debits representing the whole or part of the fair value profit or loss arising to a company in relation to its interest rate contracts in an accounting period if—
(a)there is a hedging relationship between the contract or a portion of the contract and any of the risks arising in respect of an asset, liability, receipt or expense (“the hedged item”); and
(b)fair value profits or losses arising on the hedged item or in relation to any of the risks arising in respect of the hedged item, or any portion of the hedged item, are not brought into account for the purposes of corporation tax for that period.
(2) Where paragraph (1) applies, credits and debits shall be brought into account for the purposes of paragraph 17C(1)(b) of Schedule 26 to the Finance Act 2002 on the assumption that an appropriate accruals basis had been used in relation to the contract for that accounting period.
[F65(2A) Where an interest rate contract—
(a)becomes a contract to which paragraph (1) applies, or
(b)ceases to be a contract to which paragraph (1) applies,
the amount to be brought into account for the purposes of paragraph 17C(1)(b) of Schedule 26 to the Finance Act 2002 is such amount as is just and reasonable in the circumstances and with regard to whether as a result of the change any amounts cease to be brought into account or are brought into account more than once.]
(3) Where paragraph 16(3) of Schedule 26 to the Finance Act 2002(13) or regulation 4 apply to a contract to which this regulation applies nothing in this regulation is to require any exchange gains or losses in relation to that contract to be brought into account.
(4) In this regulation—
“an appropriate accruals basis” in relation to a derivative contract is one where—
the contract is shown in the company’s accounts at cost (which may be nil), and the cost is adjusted for any cumulative amortisation of any premium or other amount falling to be recognised in arriving at the cost of the contract;
the aggregate of—
the amount of periodical payments under the contract, or in the case of a swap contract under which only a single payment is to be made, the value of the payment and
the credits or debits representing interest arising, on the assumption that an effective interest method is used, in respect of the asset or liability representing a loan relationship which is the hedged item,
represent the credits or debits that would be given by generally accepted accounting practice in relation to an asset or liability representing a loan relationship whose terms include those of both the hedged item and the interest rate contract;
exchange gains and losses are recognised as a result of the translation of the contract at the balance-sheet date; and
profits and losses which arise as a result of the contract coming to an end before its stated date of maturity are amortised and brought into account over the unexpired term of the hedged item.
“an interest rate contract” means—
a derivative contract whose underlying subject matter is, or includes, interest rates, or
if not falling within paragraph (i), a swap contract in which payments fall to be made by reference to a rate of interest or to an index determined by reference to income or retail prices.
(5) For the purposes of paragraph 17C(1)(a) of Schedule 26 to the Finance Act 2002, there is also prescribed for any period any credits and debits which—
(a)have for that or any previous period been brought into account in the statement of recognised gains and losses or statement of changes in equity (“equity statements”); and
(b)represent fair value profits or losses which are transferred in that period from an equity statement—
(i)to the profit and loss account or income statement, or
(ii)directly to the carrying value of an asset or liability.
(6) Where credits and debits are prescribed by sub-paragraph (5) there is also prescribed, for the purposes of paragraph 17C(1)(a) of Schedule 26 to the Finance Act 2002, any debits and credits corresponding to the sub-paragraph (5) credits and debits which are brought into account in the profit and loss account or income statement when—
(a)the hedged item is recognised; or
(b)a forecast transaction is no longer expected to occur.
(7) This regulation does not apply to any contract to which paragraphs 6,7 or 8 of Schedule 26 to the Finance Act 2002(14) applies.
Textual Amendments
F65Reg. 9(2A) inserted (29.12.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2005 (S.I. 2005/3374), regs. 1(1), 9
Commencement Information
I9Reg. 9 in force at 1.1.2005, see reg. 1(1)
[F669A.—(1) For the purposes of paragraph 17C(1)(a) of Schedule 26 to the Finance Act 2002 there is prescribed all credits and debits representing the whole or part of the fair value profit or loss arising to a company in relation to an interest rate contract in an accounting period if—
(a)the contract or a portion of the contract (“the hedging instrument”) is designated as a hedge in respect of any risks arising in respect of an asset, liability, receipt or expense (“the hedged item”);
(b)fair value profits or losses arising on the hedging instrument are recognised in accordance with generally accepted accounting practice in the company’s statement of recognised gains and losses or statement of changes in equity (“equity statements”); and
(c)the company has made an election under regulation 6(5).
This is subject to paragraph (2).
(2) Credits and debits which—
(a)are brought into account in the profit and loss account or income statement (including debits and credits previously brought into account in an equity statement and transferred to the profit and loss account or income statement), or
(b)are taken to the carrying value of an asset or liability,
are not prescribed for the purposes of paragraph 17C(1)(a) of Schedule 26 to the Finance Act 2002.This is subject to paragraph (3).
(3) In relation to credits or debits within paragraph (2)(a), there is prescribed for the purposes of paragraph 17C(1)(a) of Schedule 26 to the Finance Act 2002 any debits or credits corresponding to the paragraph (2)(a) debits or credits which are reflected in an equity statement.
(4) In this regulation “an interest rate contract” has the same meaning as in regulation 9.]
Textual Amendments
F66Reg. 9A inserted (29.12.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2005 (S.I. 2005/3374), regs. 1(1), 10
10.—(1) For the purposes of paragraph 17C(1)(c) of Schedule 26 to the Finance Act 2002—
(a)there is prescribed the aggregate of the credits and debits representing any [F67regulation 7 or 8] fair value profits or losses excluded in relation to a derivative contract of a company F68...; and
(b)the amount of that aggregate is brought into account for the period in which a termination event occurs.
This is subject to paragraphs (3), (5), (7) and (8).
(2) In paragraph (1) a “termination event” occurs—
(a)on the company ceasing to be a party to the contract; or
(b)if earlier, when the hedged item begins to affect the company’s profit or loss.
(3) If the forecast transaction or firm commitment which is the hedged item mentioned in regulation 7 or regulation 8 is a forecast transaction of, or a firm commitment to a purchase of, anything the expenditure in relation to which—
(a)falls to be taken into account in computing the profits of a trade or property business carried on by the company, or
(b)would fall to be deducted but for any provision of the Corporation Tax Acts prohibiting the deduction of capital expenditure in respect of depreciation of an asset,
then the aggregate mentioned in paragraph (1)(a) in relation to the contract is [F69, subject to paragraph (3A),] to be brought into account in the accounting period in which the expenditure falls or would fall to be deducted.
[F70(3A) [F71Subject to paragraph (3B),] if paragraph (3)(b) applies—
(a)the amount to be brought into account in an accounting period is the product of
where—
DA is the amount of depreciation recognised in the profit and loss account or income statement in relation to the hedged item in the accounting period,
E is the total expenditure on the hedged item, and
FVP is the aggregate amount of regulation 7 or 8 fair value profit;
(b)where the hedged item is disposed of, the balance of the aggregate amount mentioned in paragraph (1)(a) which has not been brought into account under sub-paragraph (a) of this paragraph shall be brought into account in the accounting period in which the disposal takes place.]
[F72(3B) Where the disposal mentioned in paragraph (3A)(b) is to a company (“the transferee”) which is a member of the same group of companies, in applying paragraph (3A)(a) to the transferee FVP shall be treated as meaning the fair value profits and losses of the transferor.
(3C) In paragraph (3B), “group of companies” has the meaning given in paragraph 28(6) of Schedule 26 to the Finance Act 2002.]
(4) In paragraph (3) “property business” has the meaning given in paragraph 32(2) of Schedule 29 to the Finance Act 2002(15) (gains and losses of a company from intangible fixed assets).
(5) Where—
(a)part of a contract to which this regulation applies terminates without the company ceasing to be a party to the contract, or
(b)part only of the hedged item begins to be recognised in determining the company’s profit and loss,
paragraph (1)(b) [F73or paragraph (3)] is to apply to a proportionate amount of the aggregate.
(6) In paragraph (5) “proportionate amount” means that proportion of the relevant aggregate amount which is—
(a)in a case where it is part of the contract which matures, the [F74proportion] which the fair value of the part of the contract maturing bears to the fair value of the whole of the contract at that time, and
(b)in any other case the proportion which the fair value of the hedged item [F75which begins] to be recognised bears to the fair value of the whole of the hedged item at that time.
(7) Where immediately on ceasing to be a party to the contract (“the old contract”), the company enters into another contract (“the new contract”) which meets the conditions in regulation 7 or regulation 8 in relation to the same hedged item as was the hedged item in relation to the old contract—
(a)paragraph (1)(b) shall not apply in relation to the old contract, and
(b)the aggregate prescribed in paragraph (1)(a) in relation to the old contract shall be treated for the purposes of the application of this regulation to the new contract as included in the aggregate prescribed in relation to the new contract.
(8) Where as a result of the company (“the transferor company”) ceasing to be a party to the contract (“the old contract”)—
(a)paragraph 28 of Schedule 26 to the Finance Act 2002 [F76would apply but for paragraph 30 of that Schedule], and
(b)the transferee company (within the meaning of paragraph 28 of that Schedule) meets the conditions in regulation 7 or regulation 8 in relation to the contract (“the new contract”) and the same hedged item as was the hedged item in relation to the old contract,
paragraph (9) applies.
(9) Where this paragraph applies—
(a)paragraph (1)(b) shall not apply in relation to the old contract; and
(b)the aggregate prescribed in paragraph (1)(a) in relation to the old contract shall be treated for the purposes of the application of this regulation to the new contract as included in the aggregate prescribed in relation to the new contract.
(10) For the purposes of paragraph 17C(1)(a) of Schedule 26 to the Finance Act 2002, there is also prescribed for any period any credits and debits which—
(a)have for that or any previous period been brought into account in the statement of recognised gains and losses or statement of changes in equity (“equity statements”); [F77and]
(b)represent [F78regulation 7 or 8] fair value profits or losses which are transferred in that period from an equity statement—
(i)to the profit and loss account or income statement, or
(ii)directly to the carrying value of an asset or liability.
(11) Where credits and debits are prescribed by sub-paragraph (10) there is also prescribed, for the purposes of paragraph 17C(1)(a) of Schedule 26 to the Finance Act 2002, any debits and credits corresponding to the sub-paragraph (10) credits and debits which are brought into account in the profit and loss account or income statement when—
(a)the hedged item is recognised; or
(b)a forecast transaction is no longer expected to occur.
Textual Amendments
F67Words in reg. 10(1)(a) inserted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 10(2)(a)
F68Words in reg. 10(1)(a) omitted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by virtue of The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 10(2)(b)
F69Words in reg. 10(3) inserted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 10(3)
F70Reg. 10(3A) inserted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 10(4)
F71Words in reg. 10(3A) inserted (29.12.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2005 (S.I. 2005/3374), regs. 1(1), 11(2)
F72Reg. 10(3B)(3C) inserted (29.12.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2005 (S.I. 2005/3374), regs. 1(1), 11(3)
F73Words in reg. 10(5) inserted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 10(5)
F74Word in reg. 10(6)(a) substituted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 10(6)(a)
F75Words in reg. 10(6)(b) substituted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 10(6)(b)
F76Words in reg. 10(8)(a) substituted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 10(7)
F77Word in reg. 10(10)(a) substituted (29.12.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2005 (S.I. 2005/3374), regs. 1(1), 11(4)
F78Words in reg. 10(10)(b) inserted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 10(8)
Commencement Information
I10Reg. 10 in force at 1.1.2005, see reg. 1(1)
11.—(1) For the purposes of section 85B(3) of the Finance Act 1996 (amounts recognised in determining company’s profits and loss)—
(a)the amounts described in paragraph (2) are prescribed in relation to a company which is a party to a creditor relationship to which—
(i)section 92 (convertible securities etc: creditor relationships) or 93 (relationships linked to the value of chargeable assets) of the Finance Act 1996(8) applies immediately before the start of the first accounting period of the company to begin on or after 1st January 2005, and
(ii)section 94A of the Finance Act 1996(9) (loan relationships with embedded derivatives) applies in the first accounting period of the company to begin on or after 1st January 2005; and
(b)the amounts described in paragraph (3) are prescribed in relation to a company which is a party to a creditor relationship to which section 92 or 93 of the Finance Act 1996 applies immediately before the start of the first accounting period of the company to begin on or after 1st January 2005.
(2) The prescribed amounts are all credits and debits in respect of the host contract save for—
(a)credits in relation to interest accruing in respect of the creditor relationship without regard to the amounts given by the effective interest method; and
(b)credits and debits in respect of exchange gains and losses.
(3) The prescribed amounts are all credits and debits save for—
(a)credits in relation to interest, and
(b)credits and debits in respect of exchange gains and losses.
[F80(4) Where there is a change of accounting policy in drawing up a company’s accounts from one period of account to the next affecting the amounts to be brought into account for accounting purposes in respect of the company’s loan relationships, the amounts prescribed in paragraphs (1) to (3) that would otherwise be brought into account for the purposes of Chapter 2 of the Finance Act 1996 shall not be brought into account.]]
Textual Amendments
F79Regs. 11, 12 inserted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 11
F80Reg. 11(4) inserted (29.11.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2005 (S.I. 2005/3374), regs. 1(1), 12
[F7912.—(1) For the purposes of section 85B(3) of the Finance Act 1996 the amounts described in paragraph (2) are prescribed in relation to a company which is a party to a debtor relationship to which—
(a)section 92A (convertible securities etc: debtor relationships)(10) or 93 of the Finance Act 1996 applies immediately before the start of the first accounting period of the company to begin on or after 1st January 2005, and
(b)section 94A of the Finance Act 1996 applies in the first accounting period of the company to begin on or after 1st January 2005.
[F81This is subject to paragraph (4).]
(2) The prescribed amounts are all credits and debits in respect of the host contract save for—
(a)debits in relation to interest accruing in respect of the debtor relationship [F82and credits and debits in respect of discounts, premiums, fees and other incidental costs to the extent that these amounts are not within section 92A(3) of the Finance Act 1996,] without regard to the amounts given by the effective interest method; and
(b)credits and debits in respect of exchange gains and losses.
[F83(3) Where there is a change of accounting policy in drawing up a company’s accounts from one period of account to the next affecting the amounts to be brought into account for accounting purposes in respect of the company’s loan relationships, the amounts prescribed in paragraphs (1) and (2) that would otherwise be brought into account for the purposes of Chapter 2 of the Finance Act 1996 shall not be brought into account.
(4) This regulation does not apply to a company which is a party to a debtor relationship in a case where—
(a)the company is carrying on a banking business or a business consisting wholly or partly in dealing in securities, and
(b)it entered into the debtor relationship in the ordinary course of that business.]]
Textual Amendments
F79Regs. 11, 12 inserted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 11
F81Words in reg. 12(1) inserted (29.12.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2005 (S.I. 2005/3374), regs. 1(1), 13(2)
F82Words in reg. 12(2)(a) inserted (29.12.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2005 (S.I. 2005/3374), regs. 1(1), 13(3)
F83Reg. 12(3)(4) inserted (29.12.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2005 (S.I. 2005/3374), regs. 1(1), 13(4)
Derek Twigg
Nick Ainger
Two of the Lords Commissioners of Her Majesty’s Treasury
9th December 2004
(This note is not part of the Regulations)
These Regulations allow certain profits and losses from loan relationships and derivative contracts to be left out of account, to be brought into account in a different way or to be brought into account at a later date.
Regulation 1 provides for the citation, commencement and effect.
Regulation 2 provides for the interpretation.
Regulation 3 prescribes for exchange gains or losses arising from liabilities hedging shares etc. to be disregarded where the contract is matched with shares, ships or aircraft.
Regulation 4 prescribes for exchange gains or losses arising from derivative contracts hedging shares etc. to be disregarded where the contract is matched with shares, ships or aircraft.
Regulation 5 contains provisions supplementary to regulations 3 and 4.
Regulation 6 introduces, in relation to fair value profits and losses, specific rules which are contained in regulations 7, 8 and 9 and in particular provides for the rules in those regulations to be subject to elections.
Regulation 7 prescribes fair value profits and losses arising from derivative contracts which are currency contracts.
Regulation 8 prescribes bringing fair value profits and losses into account on commodity contracts and debt contracts.
Regulation 9 prescribes profits or losses arising from derivative contracts which are interest rate contracts.
Regulation 10 brings into account profits or losses arising on currency and commodity contracts.
These Regulations do not impose any new costs on business.
1996 c. 8. Section 84A was inserted by paragraph 3 of Part 1 of Schedule 23 to the Finance Act 2002 (c. 23) and sub-section (3A) was substituted by paragraph 2(2) of Schedule 10 to the Finance Act 2004 (c. 12) (“the 2004 Act”). Sections 85B was substituted and inserted by paragraph 3 of Schedule 10 to the 2004 Act.
2002 c. 23. Paragraph 16(3A) was substituted by paragraph 48(2), and paragraphs 17C(1) and 17C(3)(b) were substituted by paragraph 50, of Part 2 of Schedule 10 to the 2004 Act.
Section 103 was inserted by paragraph 17(2)(b) of Part 1 of Schedule 10 to the 2004 Act.
1992 c. 12. Part 1 was inserted by paragraph 1 of Part 1 of Schedule 8 to the Finance Act 2002.
1988 c. 1. Schedule 28AA was inserted by Schedule 16 to the Finance Act 1998 (c. 36). Paragraph 6D was inserted by section 35(2) of the 2004 Act.
Paragraph 28 was amended by section 179(1), (2), (3) and (5) of the Finance Act 2003 (c. 14) and section 30 of and paragraph 15(2) of Schedule 5 to the 2004 Act.
Paragraph 30 was amended by section 179(4) and (5) of the Finance Act 2003 and section 52 of and paragraph 57of Schedule 10 to the 2004 Act.
Section 349(5) and (6) were added by section 95 of the Finance Act 2002.
2002 c. 23. Sub-paragraph (3) was substituted by subsequent sub-paragraphs (3) and (3A) by paragraph 48(2) of Part 2 of Schedule 10 to the 2004 Act.
Paragraphs 6, 7 and 8 of Schedule 26 were amended by articles 1 and, respectively, 8, 9 and 10 of S.I. 2004/2201.