This Part sets out how profits and deficits arising to a company from its loan relationships are brought into account for corporation tax purposes.

For the meaning of “loan relationship” see section 302 and Part 6 (relationships treated as loan relationships etc).

For the priority of this Part for corporation tax purposes, see Chapter 17.

This Part needs to be read with Part 19 (general exemptions).

In this Part references to profits or losses from loan relationships include references to profits or losses from related transactions.

For the meaning of “related transaction” see section 304.

Except where the context indicates otherwise, in this Part references to profits or losses from loan relationships include references to profits or losses of a capital nature.

Part 6 deals with matters treated for some or all purposes as loan relationships or rights, payments or profits under loan relationships.

Except where the context indicates otherwise, references to this Part in this Act and elsewhere in the Tax Acts include references to Part 6.

The general rule for corporation tax purposes is that all profits arising to a company from its loan relationships are chargeable to tax as income in accordance with this Part.

But see section 465 (exclusion of distributions except in tax avoidance cases).

This section applies so far as in any accounting period a company is a party to a loan relationship for the purposes of a trade it carries on.

The credits in respect of the relationship for the period are treated as receipts of the trade which are to be brought into account in calculating its profits for that period.

The debits in respect of the relationship for the period are treated as expenses of the trade which are deductible in calculating those profits.

For the purposes of this Part a company is taken to be a party to a creditor relationship for the purposes of a trade it carries on only if it is a party to the relationship in the course of activities forming an integral part of the trade.

For the meaning of “creditor relationship”, see section 302(5).

Subsection (3) applies for the purposes of any other relevant enactment as it applies for the purposes of this Part.

In subsection (4) “relevant enactment” means so much of any enactment as contains provision by reference to which amounts are to be brought into account for the purposes of this Part.

The charge to corporation tax on income applies to any non-trading profits which a company has in respect of its loan relationships.

For the meaning of a company having such profits and how they are calculated, see section 301.

Any non-trading deficit which a company has from its loan relationships must be brought into account in accordance with Chapter 16 (non-trading deficits).

For the meaning of a company having such a deficit and how it is calculated, see section 301.

This section and Chapter 16 apply even if none of the company's loan relationships is regarded as a source of income as a result of this Part.

Whether a company has non-trading profits or a non-trading deficit from its loan relationships for an accounting period is determined as follows, using the non-trading credits and non-trading debits given by this Part for the accounting period.

A company has non-trading profits for an accounting period from its loan relationships if the non-trading credits for the period exceed the non-trading debits for the period or there are no such debits.

The non-trading profits are equal to those credits, less any such debits.

A company has a non-trading deficit for an accounting period from its loan relationships if the non-trading debits for the period exceed the non-trading credits for the period or there are no such credits.

The non-trading deficit is equal to those debits, less any such credits.

This Chapter contains rules of general application about the credits and debits to be brought into account for the purposes of this Part.

This Part operates by reference to the accounts of companies and amounts recognised for accounting purposes.

The general rule is that the amounts to be brought into account by a company as credits and debits for any period for the purposes of this Part are those that are recognised in determining the company's profit or loss for the period in accordance with generally accepted accounting practice.

For the treatment of pre-loan relationship and abortive expenses, see section 329.

Subsection (2) is subject to the provisions of this Part and, in particular, subsection (3).

If, in accordance with generally accepted accounting practice, an amount is shown as a prior period adjustment in any statement within subsection (1), it must be brought into account for the purposes of this Part in calculating the company's profits and losses for the period to which the statement relates.

Subsection (2) does not apply to an amount recognised for accounting purposes by way of correction of a fundamental error.

Accordingly, references in this Part to amounts recognised for accounting purposes are references to the amounts that would have been recognised if GAAP-compliant accounts had been drawn up for the period of account in question and any relevant earlier period.

For this purpose a period of account is relevant to a later period if the accounts for the later period rely to any extent on amounts derived from the earlier period.

In this section “GAAP-compliant accounts” means accounts drawn up in accordance with generally accepted accounting practice.

The regulations may provide that section 308(1) or (2) does not apply to specified amounts in a period of account so far as they derive from or otherwise relate to amounts brought into account in a specified way in a previous period of account.

The regulations may apply to periods of account beginning before they are made, but not earlier than the beginning of the calendar year in which they are made.

The power to make regulations under this section does not apply to exchange gains or losses (but see section 328(4) to (7)).

Section 312 applies for the purpose of determining the credits and debits which a company is to bring into account for a period for the purposes of this Part in the following case.

It does not matter for the purposes of subsection (4) whether the contribution forms part of the company's share capital or other capital for the period.

The assumption is that an amount in respect of the whole of the relationship in question is recognised in determining the company's profit or loss for the period.

But the amount of any debits to be brought into account by the company for a period as a result of this section applying in respect of its debtor relationships must not exceed the amount of any credits to be brought into account by it for the period as a result of this section applying in respect of its creditor relationships.

The credits and debits which are to be so brought into account as a result of this section are to be determined on the same basis of accounting as that on which the credits or debits mentioned in subsection (4)(a) are determined.

In any other case, the credits and debits which are to be so brought into account as a result of this section are to be determined on an amortised cost basis of accounting.

The general rule is that the amounts to be brought into account by a company as credits and debits for any period of account for the purposes of this Part may be determined on any basis of accounting that is in accordance with generally accepted accounting practice and, in particular, an amortised cost basis of accounting or fair value accounting.

See also section 314.

In this Part “amortised cost basis of accounting”, in relation to a company's loan relationship, means a basis of accounting under which an asset or liability representing the loan relationship is shown in the company's accounts at cost adjusted for cumulative amortisation and any impairment, repayment or release.

In this Part “fair value accounting” means a basis of accounting under which assets and liabilities are shown in the company's balance sheet at their fair value.

The Treasury may by regulations provide that the credits or debits must continue to be determined on an amortised cost basis of accounting.

For a case where this section and sections 316 to 318 apply as if a change of accounting policy had occurred, see section 416(5) (election for application of sections 415 and 585).

This section does not apply so far as such a credit or debit as is mentioned in this section falls to be brought into account apart from this section.

In section 316 “carrying value” means the carrying value of the asset or liability recognised for accounting purposes, except as provided in subsection (4).

For the meaning of “impairment loss” see section 476(1).

In determining the profits and losses to be recognised in determining the carrying value of the asset or liability for the purposes of this section, the provisions specified in subsection (5) apply as they apply for the purposes of determining the credits and debits to be brought into account under this Part.

Subsections (2) and (3) do not apply so far as the credit or debit falls to be brought into account apart from this section.

In this section “the amount outstanding in respect of the loan relationship” means so much of the recognised deferred income or recognised deferred loss from the loan relationship as has not been represented by credits or debits brought into account under this Part in respect of the relationship.

The Treasury may by regulations make provision for cases where there is a change of accounting policy in drawing up a company's accounts from one period of account to the next which affects the amounts to be brought into account for accounting purposes in respect of the company's loan relationships.

Regulations under this section may, in particular, modify the operation of sections 315 to 318.

The regulations may apply to periods of account beginning before they are made, but not earlier than the beginning of the calendar year in which they are made.

This section applies if generally accepted accounting practice allows a credit or debit for an accounting period in respect of a company's loan relationship to be treated in the company's accounts as an amount brought into account in determining the value of a fixed capital asset or project.

Despite that treatment, the credit or debit is to be brought into account for the purposes of this Part, for the accounting period in which it is given, 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.

But subsection (2) does not apply to a debit which is taken into account in arriving at the amount of expenditure in relation to which a debit may be given by Part 8 (intangible fixed assets).

Subsections (5) and (6) apply if a debit is brought into account as mentioned in subsection (2).

No debit may be brought into account in respect of the writing down of so much of the value of the asset or project as is attributable to that debit.

No debit may be brought into account in respect of so much of any amortisation or depreciation as represents a writing off of the interest component of the asset.

The credit or debit is to be brought into account for the period for the purposes of this Part in the same way as a credit or debit which is brought into account in determining the company's profit or loss for the period in accordance with generally accepted accounting practice.

The company is not required to bring into account a credit in respect of the release for the purposes of this Part if condition A, B or C is met.

Condition A is that the release is part of a statutory insolvency arrangement.

Section 323 applies for the interpretation of subsection (6).

For the meaning of “impairment loss” see section 476(1).

The reference in subsection (1) to revaluation of an asset includes any case where a provision or allowance is made by the company reducing the carrying value of the asset or of a group of assets including the asset in question.

This section does not affect the debits to be brought into account in respect of exchange gains or losses.

This section does not apply if fair value accounting is used.

No credit is to be brought into account for the purposes of this Part in respect of the reversal of a debit disallowed by section 324(1).

This section does not apply if fair value accounting is used.

See also paragraph 61 of Schedule 2 (restriction on bringing into account credits resulting from reversal of debits disallowed in a period of account beginning before 1 January 2005).

This section applies if a government investment in a company is written off by the release of a liability to pay any amount under a debtor relationship of the company.

The company is not required to bring into account a credit for the purposes of this Part in respect of the release.

Section 400(7) and (8) of ICTA (write-off of government investment) applies for interpreting the reference in subsection (1) to a government investment in a company being written off as it applies for the purposes of section 400(1) of that Act.

The amounts brought into account for the loss period for the purposes of this Part must be such as to secure that none of the loss referable to a time when the relationship was not so subject is treated for those purposes as arising in the loss period or any other accounting period of the company.

For the purposes of this section a loss is referable to a time when a relationship is not subject to United Kingdom taxation so far as, at the time to which the loss is referable, the company would not have been chargeable to corporation tax in the United Kingdom on any profits arising from the relationship.

If the company was not a party to the relationship at the time to which the loss is referable, subsection (3) applies as if the reference to the company were a reference to the person who at that time was in the same position as respects the relationship as is subsequently held by the company.

An amount which would be brought into account for the purposes of this Part in respect of any matter apart from this section is treated for the purposes of section 464(1) (amounts brought into account under this Part excluded from being otherwise brought into account) as if it were so brought into account.

Accordingly, that amount must not be brought into account for corporation tax purposes as respects that matter either under this Part or otherwise.

This section does not apply if fair value accounting is used.

The reference in section 307(3) to the profits and losses arising to a company from its loan relationships and related transactions includes a reference to exchange gains and losses so arising.

But subsection (1) is subject to subsections (3) and (4).

Subsection (1) does not apply to so much of an exchange gain or loss arising to a company in relation to an asset or liability representing a loan relationship of the company as is within a description specified for the purpose in regulations made by the Treasury.

The Treasury may by regulations make provision for or in connection with bringing into account in specified circumstances amounts to which subsection (1) does not apply because of subsection (3) or (4).

The reference in subsection (5) to bringing amounts into account is a reference to bringing amounts into account for the purposes of this Part as credits or debits arising to a company from its loan relationships.

For the meaning of references to exchange gains or losses from loan relationships, see section 475.

The expenses are treated as expenses in relation to which debits may be brought into account in accordance with section 307(3) to the same extent as if the company had entered into the relationship or transaction.

The debit must not be brought into account for the purposes of this Part as a non-trading debit for that period.

Condition A is that the company begins to carry on the trade within the period of 7 years after the end of the accounting period for which a non-trading debit is given for the purposes of this Part.

Condition B is that that debit is such that, if it were given for the accounting period in which the company begins to carry on the trade, it would be brought into account by reference to that trade in accordance with section 297(3).

Credits or debits in respect of so much of those profits or losses as are not represented by credits or debits brought into account for the cessation period must continue to be brought into account under this Part over one or more subsequent accounting periods (“post-cessation periods”) as in the case of a loan relationship to which the company is a party in those periods.

The question is to be determined by reference to the circumstances immediately before the company ceased to be a party to the loan relationship, instead of the circumstances in the post-cessation period.

The question is to be determined by reference to the circumstances in the cessation period instead of the circumstances in the post-cessation period.

Despite ceasing to be a party to the relationship, the company must bring amounts in respect of the relationship into account for those periods for the purposes of this Part.

The amounts that must be so brought into account are those that are so recognised in respect of the relationship (but subject to the provisions of this Part, including, in particular, section 307(3)).

Section 331(3) and (4) applies in relation to any time after the company ceases to be a party to a loan relationship in a case where this section applies as it applies where section 331 applies.

Subsection (1) does not apply in relation to an asset or liability so far as immediately after the company ceases to be UK resident the asset is held or the liability is owed for the purposes of a permanent establishment of the company in the United Kingdom.

In subsection (3) “the relevant group” has the meaning given in section 344(4).

This section applies if an asset or liability representing a loan relationship of a company which is not UK resident ceases to be held or owed for the purposes of a permanent establishment of the company in the United Kingdom in circumstances not involving a related transaction (but see subsection (3)).

In subsection (3) “the relevant group” has the meaning given in section 344(4).

Sections 344 to 346 provide for the treatment of a loan relationship in respect of which section 336 has applied where the company replacing another as a party to a loan relationship later leaves the group of companies of which they were members.

Section 347 (disapplication of Chapter where transferor party to avoidance involving subsequent transfer by transferee) disapplies this Chapter in some circumstances in the cases mentioned in 336 and 337.

For the meaning of references in this Chapter to a company replacing another as a party to a loan relationship, see section 338.

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).

In this Chapter, in relation to a case within subsection (1), “the transferee” and “the transferor” have the same meaning as in that subsection.

This section applies to the transfers specified in subsection (3), so far as they are not excluded by subsection (4).

Subsection (6) applies for the purposes of subsection (4) if one of the companies mentioned in subsection (3) is an overseas life insurance company.

In this Chapter, in relation to a case within subsection (1), “the transferee” and “the transferor” have the same meaning as in that subsection.

Rights or obligations are within this subsection if they are equivalent to those of B under a loan relationship to which B has previously ceased to be a party.

The case referred to in section 335(1)(c) is where each of conditions A to D is met.

Condition B is that the original shares consist of or include an asset representing a loan relationship.

Condition C is that company A is resident in one member State and company B is resident in another member State.

Condition D is that neither Chapter 13 (European cross-border transfers of business) nor Chapter 14 (European cross-border mergers) applies in relation to the exchange.

If company B is a company to which section 135(5) of TCGA 1992 applies (companies with no share capital), the reference in subsection (7)(c) to the shares in or debentures of company B includes a reference to any interests in the company possessed by its members.

The credits and debits to be brought into account for the purposes of this Part in respect of the loan relationship referred to in section 336(1)(b) or section 337(1)(b) are determined in accordance with subsections (3) to (5).

For the accounting period in which the transaction or, as the case may be, the first of the series of 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 asset or liability representing the relationship (see subsection (6)).

For any accounting period in which the transferee is a party to the relationship, it is treated as if it had acquired the asset or liability representing the relationship for consideration of an amount equal to its notional carrying value.

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.

Schedule 28AA to ICTA (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.

This section is subject to sections 332 and 341.

This section applies instead of section 340 if, in a case where that section would otherwise apply, the transferor is regarded for the purposes of this section as using fair value accounting in respect of the loan relationship (see subsection (5)).

For any accounting period in which the transferee is a party to the loan relationship, for the purpose of determining the credits and debits to be brought into account in respect of the relationship for the purposes of this Part, the transferee is treated as if it had acquired the asset or liability representing the relationship for consideration of an amount equal to the transferor's amount.

If a discount arises in respect of the transaction or series of transactions, the transferor's amount is increased for the purposes of subsection (2) (but not subsection (3)) by the amount of the discount.

The transferor is regarded for the purposes of this section as using fair value accounting in respect of the loan relationship only if the credits and debits to be brought into account for the purposes of this Part as respects the relationship are determined on that basis.

It does not matter for the purposes of subsection (5) if the transferor does not otherwise use fair value accounting in respect of the loan relationship.

For the purposes of this section, section 480(5) (when discount arises) applies as it applies for the purposes of section 480.

This section is subject to section 332.

This section applies in the case mentioned in section 339.

For the purposes of this Part such debits and credits are to be brought into account as would be brought into account if the exchange were a disposal of the asset representing the loan relationship referred to in section 339(3) for consideration of an amount equal to its notional carrying value.

For the purposes of this section, the notional carrying value of that asset is the amount that would have been its carrying value in the accounts of the receiving company if a period of account had ended immediately before the date when the exchange occurred.

This section is subject to section 343.

This section applies instead of section 342 if, in a case where that section would otherwise apply, the receiving company is regarded for the purposes of this section as using fair value accounting in respect of the loan relationship constituting or included in the original shares.

The amount which is to be brought into account by the receiving company in respect of the exchange (“the disposal amount”) is the fair value of the asset representing the loan relationship as at the date when the exchange occurred, or of the rights under or interest in that relationship as at that date.

For any accounting period in which company B is a party to the loan relationship, for the purpose of determining the credits and debits to be brought into account in respect of the relationship for the purposes of this Part, company B is treated as if it had acquired the asset representing the relationship for consideration of an amount equal to the disposal amount.

Subsections (5) and (6) of section 341 apply for the purposes of this section as they apply for the purpose of that section, taking references in that section to the transferor as references to the receiving company.

In this section “company B”, “original shares” and “receiving company” have the meaning given in section 339(7).

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 treated for the purposes of this section and sections 345 and 346 as if the relevant group and the other group were the same.

Condition A is that if this Part applied as mentioned in subsection (2) because of that subsection applying, a credit would be brought into account for the purposes of this Part by the transferee because of subsection (2)(a) and (b).

Section 707 (meaning of “hedging relationship”) applies for the purposes of this section.

Condition A is that if subsection (2) applied a credit would be brought into account for the purposes of this Part by the transferee because of subsection (2)(a) and (b).

Section 707 (meaning of “hedging relationship”) applies for the purposes of this section.

Condition A is that the transferor is a party to arrangements in accordance with which there is likely to be a transfer of rights or liabilities under the loan relationship by the transferee to another person in circumstances in which section 336 or 337 would not apply.

Condition B is that the purpose or one of the main purposes of the arrangements is to secure a tax advantage for the transferor or a person connected with it.

This Chapter does not apply in relation to a disposal in the cases mentioned in subsection (1) if section 455 (disposals for consideration not fully recognised by accounting practice) applies in relation to the disposal.

This Chapter contains rules about impairment losses and releases of debts in the case of companies connected with other companies.

In this Chapter “release debit” means a debit in respect of a release by a company of liability under a creditor relationship of the company.

Section 466 (companies connected for an accounting period) applies for the purposes of sections 354 to 360.

For the circumstances in which companies are connected for sections 361 and 362, see section 363.

For the meaning of “impairment loss” see section 476(1).

The general rule is that no impairment loss or release debit in respect of a company's creditor relationship is to be brought into account for the purposes of this Part for an accounting period if section 349 (application of amortised cost basis to connected companies relationship) applies to the relationship for the period.

Nothing in this section affects the debits to be brought into account for the purposes of this Part in respect of exchange gains or losses arising from a debt.

An impairment loss or release debit in relation to a liability to pay any amount to a company (“the creditor company”) under its creditor relationship is not prevented from being brought into account by section 354 if conditions A, B and C are met.

Condition A is that the creditor company treats the liability as discharged.

Condition A is that the creditor is in insolvent liquidation, and for this condition the relevant time is any time in the course of the winding up.

Condition B is that the creditor is in insolvent administration, and for this condition the relevant time is any time in the course of the administration.

Condition C is that the creditor is in insolvent administrative receivership, and for this condition the relevant time is any time when the appointment of the administrative receiver is in force.

Condition D is that an appointment of a provisional liquidator is in force in relation to the creditor under section 135 of the Insolvency Act 1986 (c. 45) or Article 115 of the Insolvency (Northern Ireland) Order 1989 (S.I. 1989/2405 (N.I. 19)), and for this condition the relevant time is any time when the appointment is in force.

Condition E is that under the law of a country or territory outside the United Kingdom, circumstances exist corresponding to those described in condition A, B, C or D, and for this condition the relevant time is any time corresponding to that described in the case of the condition in question.

Section 323 applies for interpreting this section as it applies for interpreting section 322(6).

The company is only required to bring a credit into account in respect of the release for the purposes of this Part if it is a deemed release.

The company is not required to bring into account a credit in respect of the release for the purposes of this Part.

If an impairment loss is prevented from being brought into account by section 354, no credit in respect of any reversal of the impairment may be brought into account for the purposes of this Part.

Nothing in this section affects the credits to be brought into account for the purposes of this Part in respect of exchange gains or losses arising from a debt.

C is treated as releasing its rights under the loan relationship when it acquires them.

The amount treated as released is the amount of the difference referred to in subsection (1)(e).

In subsection (1)(e) “the pre-acquisition carrying value” means the amount which would be the carrying value of the liability under the loan relationship in D's accounts if a period of account had ended immediately before C became a party to it.

C is treated as releasing its rights under the loan relationship when C and D become connected.

The amount treated as released is the amount of the impairment adjustment referred to in subsection (1)(c).

In subsection (1)(c) “the pre-connection carrying value” means the amount that would be the carrying value of the asset representing the loan relationship in C's accounts if a period of account had ended immediately before the companies became connected.

For the purposes of sections 361 and 362 there is a connection between two companies at any time if condition A or B is met at that time.

Condition A is that one company has control of the other.

Condition B is that both companies are under the control of the same person (but see subsection (6)).

For the purposes of sections 361 and 362 there is a connection between two companies in a period of account if there is a connection between them (within subsection (1)) at any time in the period.

Section 472 (meaning of “control”) applies for the purposes of this section.

Section 468 (connection between companies to be ignored in some circumstances) applies for the purposes of this section as it applies for the purposes of the provisions which apply section 466, taking references in sections 468 and 469 to the accounting period as references to the period of account.

For the meaning of “international organisation”, see section 476(2) and (3).

This Chapter contains special rules about the treatment of the loan relationships of insurance companies.

In this Chapter “BLAGAB” means basic life assurance and general annuity business.

Sections 388 to 391 apply instead of Chapter 16 (non-trading deficits) if a company has a non-trading deficit from its loan relationships for BLAGAB for any accounting period.

In those sections “the deficit” and “the deficit period” mean that deficit and that period respectively.

The basic rule is that the deficit must be set off against any income and gains of the deficit period which are referable to BLAGAB.

The income and gains are reduced accordingly.

Any such reduction is made before any expenses deduction under section 76 of ICTA (expenses of insurance companies).

The claim amount reduces the company's available profits in the most recent accounting period of the company, before any remainder reduces those in the next most recent accounting period and then those in the next most recent accounting period.

For the meaning of “available profits”, see section 390.

In this section and that section “permitted period” means the period of 12 months immediately before the deficit period.

For the purposes of section 389 the available profits of the company for an accounting period are its BLAGAB non-trading loan relationships profits for the period (see subsection (4)), less the unused part of the relevant deductions for the period (see subsection (5)).

If an accounting period ending within the permitted period begins before it, only a part of the amount which would otherwise be the available profit for that accounting period is available profit.

That part is so much as is proportionate to the part of the accounting period in the permitted period.

References in this section to a company's BLAGAB non-trading loan relationships profits for an accounting period are references to the amount (if any) which is chargeable to tax for that period under section 299 (charge to tax on non-trading profits) for the company's BLAGAB.

In the case of any claim under section 389, the reference in Step 1(a) in subsection (5) to the expenses deduction for an accounting period given by Step 8 in section 76(7) of ICTA and the reference in Step 2(a) in subsection (5) to the deduction for expenses as a result of section 76 of ICTA for an accounting period are references to the deduction for expenses that would have been made as a result of that section for that period on the assumptions in subsections (7) and (8).

That deficit must be carried forward to the accounting period immediately after the deficit period (“the next period”).

This section applies to any loan relationship of a corporate member of Lloyd's.

In this section “corporate member” and “premium trust fund” have the same meaning as in Chapter 5 of Part 4 of FA 1994 (Lloyd's underwriters: corporations etc) (see section 230(1) of that Act).

This section applies if a debtor relationship of an insurance company is represented by a liability which is a liability of its long-term insurance fund.

Any question arising for the purposes of the Corporation Tax Acts as to how far any credits or debits given for the purposes of this Part in respect of the liability are referable to any particular category of the company's long-term business is determined as follows.

In the case of credits and debits within the rules in section 394, that section applies.

In the case of other credits and debits, the relevant fraction of the credits or debits is referable to a category of long-term business.

This section sets out the rules referred to in section 393(3) as to how far certain credits or debits given for the purposes of this Part in respect of liabilities representing a debtor relationship of an insurance company which are liabilities of its long-term insurance fund are referable to any particular category of its long-term business.

If the liabilities are liabilities of an internal linked fund of the company relating to one category of long-term business, the credits or debits are referable to that category.

If the liabilities are liabilities of an internal linked fund of the company relating to two or more such categories, the credits or debits are referable to those categories in the same proportions as the linked assets in the fund are apportioned to them under section 432ZA(4) of ICTA (linked assets).

Debits relating to interest payable in respect of the late payment of any benefits are referable to the category of long-term business that comprises the effecting and carrying out of the policies or contracts under which the benefits are payable.

Profits or losses of a capital nature arising to an investment trust from a creditor relationship may not be brought into account as credits or debits for the purposes of this Part.

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 that prepares accounts in accordance with international accounting standards.

Profits or losses of a capital nature arising to a venture capital trust from a creditor relationship may not be brought into account as credits or debits for the purposes of this Part.

In this section “the Statement of Recommended Practice” has the meaning given in section 395(3) (investment trusts: profits or losses of a capital nature).

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 that prepares accounts in accordance with international accounting standards.

In calculating the income of a credit union for any accounting period, no credit is to be brought into account for the purposes of this Part in respect of a loan relationship of the union if a member of the union stands in the position of debtor in relation to the debt in question.

No debit is to be brought into account for the purposes of this Part in respect of a loan relationship of a credit union if a member of the union stands in the position of creditor in relation to the debt in question.

This Chapter sets out rules relating to the holding of particular kinds of securities.

For other special rules about deeply discounted securities, see section 385 (company partners' shares where firm owns deeply discounted securities).

This section applies if a loan relationship is represented by an index-linked gilt-edged security.

The amounts to be brought into account for the purposes of this Part are to be determined using fair value accounting.

But, in calculating those amounts, the adjustment specified in section 400 (adjustments for changes in index) must be made if that section applies.

In this section and section 400 “index-linked gilt-edged securities” means any gilt-edged securities under which the amounts of the payments are determined wholly or partly by reference to the retail prices index.

For the meaning of “gilt-edged securities”, see section 476(1).

If that change is an increase, the carrying value of the security at the earlier time is increased by the same percentage as the percentage increase in the retail prices index between those times.

If that change is a reduction, the carrying value of the security at the earlier time is reduced by the same percentage as the percentage reduction in the retail prices index between those times.

But if the earlier time falls at the beginning of an accounting period which begins with the first day of a month, the index for the previous month is used for the purposes of subsection (6)(a).

Subsections (3) and (4) apply if a person exchanges a gilt-edged security for strips of that security.

The security is treated as having been redeemed at the time of the exchange by the payment to that person of its market value.

The person is treated as having acquired each strip for an amount equal to—

$A\times \frac{B}{C}$

where—

A is the market value of the security at the time of the exchange,

B is the market value of the strip at that time, and

C is the total of the market values at that time of all the strips received in the exchange.

Subsections (6) and (7) apply if strips of a gilt-edged security are consolidated into a single gilt-edged security by being exchanged by any person for that security.

Each strip is treated as having been redeemed at the time of the exchange by the payment to that person of the amount equal to its market value.

The person is treated as having acquired the security for the amount equal to the total of the market values of all the strips given in the exchange.

For the meaning of “market value” and “strip” in relation to securities, see section 402 and section 403 respectively.

References in section 401 to the market value of a security given or received in exchange for another are references to its market value at the time of the exchange.

In sections 401 and 402 “strip”, in relation to a gilt-edged security, means a security issued under the National Loans Act 1968 (c. 13) which meets conditions A, B and C.

After the balance has been struck for a dividend on a gilt-edged security, a payment to be made in respect of that dividend is treated for the purposes of conditions A, B and C as not being a payment remaining to be made under that security.

Condition A is that the company is the beneficial owner of the security.

Condition B is that the company is a company which would be exempt from corporation tax on the security under section 1279 (exemption of profits from FOTRA securities).

In this section “FOTRA security” has the same meaning as in that section (see section 1280(1)).

Interest on money borrowed for the purposes of the business is to be brought into account as a debit for the purposes of this Part for that period only so far as it exceeds the ineligible amount.

The ineligible amount is found as follows—

Step 1

Add together all sums borrowed for the purposes of the business and still owing in the accounting period.

Step 2

Deduct any sums carrying interest that is not brought into account as a debit under this Part (otherwise than because of subsection (2)).

Step 3

If the amount found at Step 2 exceeds the total cost of the 3½% War Loan 1952 Or After held for the purposes of the business in the accounting period, deduct the excess from that amount.

Step 4

Calculate the average rate of interest in the accounting period on money borrowed for the purposes of the business.

Step 5

Calculate the amount of interest payable on the amount found at Step 3 at the rate found at Step 4 for the accounting period.

The result is the ineligible amount.

If the company's holding of 3½% War Loan 1952 Or After has fluctuated during the accounting period, the total cost for the purposes of Step 3 is taken to be—

$C\times \frac{\mathrm{AH}}{\mathrm{TH}}$

where—

C is the cost of acquisition of the initial holding (if any) and any holdings acquired during the accounting period,

AH is the average holding in that period, and

TH is the total of the initial holding (if any) and any holdings acquired during the accounting period.

In subsection (4) “initial holding” means the holding held by the company at the beginning of the accounting period.

In this section and sections 407 to 412 “deeply discounted security” has the same meaning as in Chapter 8 of Part 4 of ITTOIA 2005 (profits from deeply discounted securities) (see section 430 of that Act).

The provisions of Chapter 8 of Part 4 of ITTOIA 2005 apply for the purposes of this section and sections 407 to 412 for determining the difference between the issue price of a security and the amount payable on redemption as they apply for the purposes of section 430 of that Act.

The amount of the discount which is referable to the relevant period is the amount of it which would be brought into account for that period apart from this section.

For the meaning of “standing in the position of a creditor” and the meaning of “corresponding creditor relationship” where a company indirectly stands in that position, see section 412.

Whether there is a connection between companies for the purposes of this section is determined in accordance with section 408.

For the purposes of section 407 there is a connection between two companies for an accounting period if condition A or B is met.

Condition A is that there is a time in the period when one of the companies has control of, or a major interest in, the other.

Condition B is that there is a time in the period when both companies are under the control of the same person.

Section 472 (meaning of “control”) applies for the purposes of this section.

For the meaning of “major interest”, see section 473.

If there is a person within subsection (1)(b) for only part of the relevant period, subsection (2) applies only to the appropriate proportion of the relevant debits.

In subsection (3) “the appropriate proportion” means the proportion that the part of the relevant period for which there is such a person bears to the whole of that period.

The amount of the discount that is referable to the relevant period is the amount of it which would be brought into account for the purposes of this Part for the relevant period in the case of the issuing company, apart from subsections (2) and (3).

For the meaning of “corresponding creditor relationship”, see section 412 (persons indirectly standing in the position of creditor).

Section 472 (meaning of “control”) applies for the purposes of section 409 and this section.

A person who is a participator in a company which controls another company is treated for the purposes of section 409 as being a participator in that other company also.

Subject to that, in section 409 and this section “participator”, in relation to a company, means a person who is a participator in the company for the purposes of Part 11 of ICTA because of section 417 of that Act, but not a person who is a participator for those purposes just because of being a loan creditor of the company.

In determining whether a person who carries on the trade of banking is a participator in a company for the purposes of section 409 and this section, securities of the company acquired by the person in the ordinary course of the person's business are ignored.

For the purposes of sections 407(1)(b) and 409 a person is treated as standing in the position of a creditor if the person indirectly stands in that position by reference to a series of loan relationships or relevant money debts.

If a company (“C”) is so treated for the purposes of section 407(1)(b), the reference in section 407(1)(e) to the corresponding creditor relationship is a reference to C's creditor relationship.

If a person (“P”) is so treated for the purposes of section 409, the reference in section 410(2)(b) to the corresponding creditor relationship is a reference to P's creditor relationship.

In subsection (1) “relevant money debt” means a money debt which would be a loan relationship if a company directly stood in the position of creditor or debtor.

This section applies to the issue of funding bonds to a creditor in respect of a liability to pay interest on a debt incurred by a body corporate, a government, a public institution or other public authority.

The issue is treated for the purposes of the Corporation Tax Acts as if it were the payment of so much of that interest as equals the market value of the bonds at their issue.

In this section “funding bonds” includes any bonds, stocks, shares, securities or certificates of indebtedness.

In this section “funding bonds” includes any bonds, stocks, shares, securities or certificates of indebtedness.

The company is treated for the purposes of this Part as a party to a loan relationship whose rights and liabilities consist only of those of the host contract.

For the corresponding treatment of the rights and liabilities within subsection (1)(b), see section 585 (loan relationships with embedded derivatives).

The company may elect that this Part and Part 7 (derivative contracts) should apply as if sections 415 and 585 did apply.

The election has effect in relation to all relevant assets held by the company including those subsequently acquired, except as provided in subsection (4).

An election made on or after 12 March 2008 does not have effect in relation to any relevant assets in the case of which section 418 (loan relationships treated differently by connected debtor and creditor) applies.

If an election is made under this section, sections 315 to 318 (adjustments on change of accounting policy) apply as if there were a change of accounting policy consisting of the company treating its relevant assets as mentioned in section 415(1) as from the date the election has effect.

See also section 613(4) (which makes provision corresponding to subsection (5) for the purposes of Part 7).

Section 417 makes further provision about elections under this section.

An election under section 416 must be made not later than 90 days after the acquisition of the relevant assets or, if there is more than one acquisition, the first of them.

The election is irrevocable.

The election has effect from the beginning of the period of account in which the first relevant asset is acquired.

In this section “relevant assets” has the same meaning as in section 416.

Condition B is that the creditor, in accordance with generally accepted accounting practice, does not treat its rights and liabilities under the loan relationship as so divided.

The creditor is treated for the purposes of this Part as bringing into account for the corresponding accounting period or periods additional credits in respect of the loan relationship of an amount equal to the excess.

But if the creditor is a party to the loan relationship as creditor during only part of the corresponding accounting period (or any of the corresponding periods), it is treated for the purposes of this Part as bringing into account for the period only such part of the excess as is just and reasonable.

Section 419 supplements this section.

References in section 418 to a company being a party to a loan relationship as debtor or creditor include a company which indirectly stands in the position of a debtor or creditor as respects the loan relationship by reference to a series of loan relationships or relevant money debts.

In subsection (1) “relevant money debt” means a money debt that would be a loan relationship if a company directly stood in the position of debtor or creditor.

If a corresponding accounting period of the creditor does not coincide with that of the debtor, such apportionments as are just and reasonable are to be made for the purposes of section 418.

Two companies are connected for the purposes of section 418 if their accounting results are reflected in the consolidated group accounts of a group of companies.

Subsection (5) does not affect the application of section 839 of ICTA (how to tell whether persons are connected).

In this section “the debtor” and “the creditor” have the same meaning as in section 418.

In determining the credits and debits to be brought into account for the accounting period in accordance with an amortised cost basis, the assumption in subsection (4) is to be made.

The assumption is that A or A's associate will exercise the power to determine whether and on what date any amount will become due in the way which appears to be the most advantageous to A.

Sections 424 and 425 (reorganisations involving loan relationships) also apply if, in addition to the conditions in section 424(1)(a) and (b), condition C is met in relation to the transfer in the course of which the reorganisation in question occurs.

For the meaning of “company” and “resident in a member State”, see section 430.

This section applies if in the course of the transfer of business the transferor transfers an asset or liability representing a loan relationship to a transferee.

For the purpose of determining the credits and debits to be brought into account in respect of the loan relationship for the purposes of this Part, the transferor and the transferee are treated as having entered into the transfer of that asset or liability for consideration of an amount equal to the notional carrying value of the asset or liability.

This section is subject to section 423 (transferor using fair value accounting).

This section applies instead of section 422 if, in a case where that section would otherwise apply, the transferor is regarded for the purposes of this section as using fair value accounting in respect of the loan relationship (see subsection (4)).

For any accounting period in which the transferee is a party to the loan relationship, for the purpose of determining the credits and debits to be brought into account in respect of it for the purposes of this Part, the transferee is treated as if it had acquired the asset or liability representing the relationship for consideration of an amount equal to the transferor's amount.

The transferor is regarded for the purposes of this section as using fair value accounting in respect of the loan relationship only if the credits and debits to be brought into account for the purposes of this Part as respects the relationship are determined on that basis.

It does not matter for the purposes of subsection (4) if the transferor does not otherwise use fair value accounting in respect of the loan relationship.

For the purposes of this Part such debits and credits are to be brought into account as would be brought into account if the reorganisation were a disposal of the asset representing the loan relationship for consideration of an amount equal to its notional carrying value.

For the purposes of this section, the notional carrying value of that asset is the amount which would have been its carrying value in the accounts of the original holder if a period of account had ended immediately before the date when the reorganisation occurred.

This section applies instead of section 424 if, in a case where that section would otherwise apply, the original holder is regarded for the purposes of this section as using fair value accounting in respect of the loan relationship constituting or included in the original shares.

The amount which is to be brought into account by the original holder in respect of the reorganisation (“the disposal amount”) is the fair value of the asset representing the loan relationship as at the date when the reorganisation occurred, or of the rights under or interest in that relationship as at that date.

For any accounting period in which a successor creditor company is a party to the loan relationship, for the purpose of determining the credits and debits to be brought into account in respect of the relationship for the purposes of this Part, the successor creditor company is treated as if it had acquired the asset representing the loan relationship for consideration of an amount equal to the disposal amount.

Subsections (4) and (5) of section 423 apply for the purposes of this section as they apply for the purposes of that section, but taking the references in that section to the transferor as references to the original holder.

This section is subject to section 429 (disapplication of Chapter where transparent entities involved).

This section applies in relation to an application under section 426(2).

The application must be in writing and must contain particulars of the operations which are to be effected.

The Commissioners for Her Majesty's Revenue and Customs may by notice require the applicant to provide further particulars for the purpose of enabling them to make their decision.

Such a notice may only be given within 30 days of the receipt of the application or of any further particulars previously required under subsection (3).

If such a notice is not complied with within 30 days or such longer period as the Commissioners for Her Majesty's Revenue and Customs may allow, they need not proceed further on the application.

In that case any notification by the tribunal has effect for the purposes of section 426(2)(b) as if it were a notification by the Commissioners for Her Majesty's Revenue and Customs.

This Chapter does not apply in relation to the transfer of business if the transferor is a transparent entity.

If any transferee is a transparent entity, sections 424 and 425 (reorganisations involving loan relationships) do not apply.

In this section “transparent entity” means a company which is resident in a member State other than the United Kingdom and does not have an ordinary share capital.

For the meaning of “resident in a member State”, see section 430.

In this Chapter “company” means any entity listed as a company in the Annex to the Mergers Directive.