Corporation Tax Act 2009

Chapter 3 U.K. Credits and debits to be brought into account: general

Introduction U.K.

594 Overview of Chapter U.K.

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

(2) In particular, it—

(a) sets out the general principles which are to apply in relation to the bringing into account of credits and debits, including the use of generally accepted accounting practice and the taking into account of related transactions (see sections 595 and 596),

(b) makes provision about the interpretation of the expression “amounts recognised in determining a company's profit or loss” (see sections 597 to 599),

(c) makes provision in relation to the application of fair value accounting (see sections 600 to 603),

(d) sets out some general rules which differ from generally accepted accounting practice (see sections 604 and 605),

(e) makes provision about exchange gains and losses (see section 606),

(f) makes provision about pre-contract or abortive expenses (see section 607),

(g) makes provision about companies ceasing to be parties to derivative contracts and companies moving abroad (see sections 608 to 610), and

(h) makes provision in relation to statutory insolvency arrangements (see section 611).

General principles U.K.

595 General principles about the bringing into account of credits and debits U.K.

(1) This Part operates by reference to the accounts of companies and amounts recognised for accounting purposes in those accounts.

(2) The general rule is that the amounts to be brought into account by a company as credits or debits for any period for the purposes of this Part are those which are recognised in determining the company's profit or loss for the period in accordance with generally accepted accounting practice (but this is subject to subsections (3) and (4)).

(3) The credits and debits to be brought into account in respect of a company's derivative contracts are the amounts which, when taken together, fairly represent for the accounting period in question—

(a) all profits and losses of the company which arise to it from its derivative contracts and related transactions (excluding expenses), and

(b) all expenses incurred by the company under or for the purposes of those contracts and transactions.

(4) Expenses are only treated as incurred as mentioned in subsection (3)(b) if they are incurred directly—

(a) in bringing any of the derivative contracts into existence,

(b) in entering into or giving effect to any of the related transactions,

(c) in making payments under any of those contracts or as a result of any of those transactions, or

(d) in taking steps to ensure the receipt of payments under any of those contracts or in accordance with any of those transactions.

(5) For the treatment of pre-contract or abortive expenses, see section 607.

(6) In subsection (3) “profits and losses” includes profits and losses of a capital nature.

(7) This section is subject to the following provisions of this Part.

(8) For the meaning of “related transaction” see section 596.

596 Meaning of “related transaction” U.K.

(1) In this Part “related transaction”, in relation to a derivative contract, means any disposal or acquisition (in whole or in part) of rights or liabilities under the contract.

(2) For this purpose the cases where there is taken to be such a disposal or acquisition include—

(a) those where rights or liabilities under the derivative contract are transferred or extinguished by any sale, gift, surrender or release, and

(b) those where the contract is discharged by performance in accordance with its terms.

Amounts recognised in determining a company's profit or loss U.K.

597 Amounts recognised in determining a company's profit or loss U.K.

(1) References in this Part to an amount recognised in determining a company's profit or loss for a period are to an amount recognised in—

(a) the company's profit and loss account, income statement or statement of comprehensive income for that period,

(b) the company's statement of total recognised gains and losses, statement of recognised income and expense, statement of changes in equity or statement of income and retained earnings for that period, or

(c) any other statement of items recognised in calculating the company's profits and losses for that period.

(2) 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.

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

598 Regulations about recognised amounts U.K.

(1) The Treasury may by regulations make provision—

(a) excluding amounts of a specified description from section 597(1) (amounts recognised in determining a company's profit or loss),

(b) requiring amounts of a specified description which are not within section 597(1) to be brought into account in determining a company's profit or loss for a period in specified circumstances, and

(c) as to the way in which any such amounts are to be brought into account.

(2) For the purposes of subsection (1)(b), it does not matter whether the amounts are not within section 597(1) because of regulations under subsection (1)(a) or otherwise.

(3) The regulations may (in particular) make provision by reference to the fact that amounts derive from or otherwise relate to amounts brought into account in a specified way in a previous period of account.

(4) The regulations may—

(a) make different provision for different cases, and

(b) make provision subject to an election or to other specified conditions.

(5) The regulations may apply, exclude or modify any of the provisions of this Part in relation to cases for which provision is made by the regulations.

(6) 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.

599 Meaning of “amounts recognised for accounting purposes” U.K.

(1) If a company—

(a) draws up accounts which are not GAAP-compliant accounts, or

(b) does not draw up accounts at all,

this Part applies as if GAAP-compliant accounts had been drawn up.

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

(3) 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.

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

Application of fair value accounting U.K.

600 Contract which is or forms part of financial asset or liability U.K.

(1) This section applies to a derivative contract which meets the condition in section 579(1)(b) (contract which is or forms part of a financial asset or liability for accounting purposes).

(2) The amounts to be brought into account in accordance with this Part in respect of the contract are to be determined on the basis of fair value accounting.

601 Contract relating to holding in OEIC, unit trust or offshore fund U.K.

(1) This section applies if a company is a party in an accounting period to a relevant contract which is treated as a derivative contract under section 587 (contract relating to holding in OEIC, unit trust or offshore fund).

(2) The credits and debits which are to be brought into account in accordance with this Part in respect of the relevant contract are to be determined on the basis of fair value accounting.

602 Contract becoming one relating to holding in OEIC, unit trust or offshore fund U.K.

(1) This section applies if—

(a) a company is a party to a relevant contract in two successive accounting periods,

(b) section 587 (contract relating to holding in OEIC, unit trust or offshore fund) applies in relation to the relevant contract for the second accounting period but not the first accounting period, and

(c) immediately before the beginning of the second accounting period the relevant contract was a chargeable asset.

(2) For the purposes of section 601(2), the opening valuation of the contract as at the beginning of the second accounting period is taken to be equal to the market value of the contract.

(3) In subsection (2) “the market value of the contract” means the amount which would have been the market value of the contract for the purposes of corporation tax on chargeable gains if it had been disposed of immediately before the end of the first accounting period.

(4) For the rules which apply where the company ceases to be a party to the contract, see section 660 (company ceasing to be party to contract relating to holding in OEIC, unit trust or offshore fund).

603 Associated transaction treated as derivative contract U.K.

(1) This section is to be read as if it were in Chapter 7 (shares with guaranteed returns etc) of Part 6 (relationships treated as loan relationships etc).

(2) See, in particular, section 532(3) (meaning of “associated transaction”).

(3) Subsection (4) applies if credits and debits are required to be brought into account in accordance with this Part in respect of any associated transaction because of section 588 (which treats such a transaction which is not a derivative contract as if it were).

(4) Those credits and debits are to be determined on the basis of fair value accounting.

Rules differing from generally accepted accounting practice U.K.

604 Credits and debits treated as relating to capital expenditure U.K.

(1) This section applies if generally accepted accounting practice allows a credit or debit for an accounting period in respect of a company's derivative contract to be treated in the company's accounts as an amount recognised in determining the value of a fixed capital asset or project.

(2) Despite that treatment, the credit or debit must be brought into account in accordance with this Part, in the accounting period for which it is given, in the same way as a credit or debit which is recognised in determining the company's profit or loss for that period in accordance with generally accepted accounting practice.

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

(4) Subsection (5) applies if a debit is recognised as mentioned in subsection (1).

(5) No debit may be brought into account in accordance with this Part in respect of—

(a) the writing down of so much of the value of the asset or project, or

(b) so much of any amortisation or depreciation as represents a writing off of that value,

as is attributable to that debit.

605 Credits and debits recognised in equity U.K.

(1) This section applies if in accordance with generally accepted accounting practice a credit or debit for a period in respect of a company's derivative contract—

(a) is recognised in equity or shareholders' funds, and

(b) is not recognised in any of the statements mentioned in section 597(1) (amounts recognised in determining a company's profit or loss).

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

Miscellaneous U.K.

606 Exchange gains and losses U.K.

(1) The reference in section 595(3) to the profits and losses arising to a company from its derivative contracts includes a reference to exchange gains and losses so arising.

(2) Subsection (1) is subject to subsections (3) and (4).

(3) Subsection (1) does not apply to an exchange gain or loss of a company so far as—

(a) it arises—

(i) in relation to a derivative contract whose underlying subject matter consists wholly or partly of currency, or

(ii) as a result of the translation from one currency to another of the profit or loss of part of the company's business, and

(b) it is recognised in the company's statement of total recognised gains and losses, statement of recognised income and expense, statement of changes in equity or statement of income and retained earnings.

(4) Subsection (1) does not apply to so much of an exchange gain or loss arising to a company in relation to a derivative contract whose underlying subject matter consists wholly or partly of currency as is within a description specified for the purpose in regulations made by the Treasury.

(5) 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).

(6) The reference in subsection (5) to bringing amounts into account is a reference to bringing amounts into account—

(a) for the purposes of this Part as credits or debits arising to a company from its derivative contracts, or

(b) for the purposes of corporation tax on chargeable gains.

(7) The regulations may—

(a) make different provision for different cases, and

(b) make provision subject to an election or to other specified conditions.

(8) For the meaning of references to exchange gains or losses from derivative contracts, see section 705.

607 Pre-contract or abortive expenses U.K.

(1) This section applies if—

(a) a company may enter into a derivative contract or related transaction but has not yet done so,

(b) it incurs any expenses for purposes connected—

(i) with entering into it, or

(ii) with giving effect to any obligation which might arise under it, and

(c) had the company entered into the contract or transaction, the expenses would be expenses within section 595(3)(b).

(2) The expenses are treated as expenses in relation to which debits may be brought into account in accordance with section 595(3) to the same extent as if the company had entered into the contract or transaction.

608 Company ceasing to be party to derivative contract U.K.

(1) This section applies if—

(a) a company ceases to be a party to a derivative contract in an accounting period (the “cessation period”),

(b) profits or losses arise to the company from the derivative contract or a related transaction in that period, and

(c) the credits or debits brought into account in accordance with this Part for that period do not include credits or debits representing the whole of those profits or losses.

(2) 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 in accordance with this Part over one or more subsequent accounting periods (“post-cessation periods”) as in the case of a derivative contract to which the company is a party in those periods.

(3) Subsection (4) applies if any question arises how far in a post-cessation period—

(a) the company is a party to the derivative contract for the purposes of a trade it carries on, or

(b) the derivative contract is referable to a particular business the company carries on or a particular description of such business.

(4) The question is to be determined by reference to the circumstances immediately before the company ceased to be a party to the derivative contract, instead of the circumstances in the post-cessation period.

(5) Subsection (6) applies if any question arises—

(a) how far the derivative contract has a particular purpose in a post-cessation period, or

(b) whether there is a connection between the company and any other person for a post-cessation period.

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

(7) For the purposes of the Corporation Tax Acts, references to a person's derivative contracts and to a person being a party to a derivative contract are to be read in accordance with this section.

609 Company ceasing to be UK resident U.K.

(1) If a company ceases to be UK resident, this Part applies as if—

(a) immediately before so ceasing the company had assigned the rights and liabilities under its derivative contracts for consideration of an amount equal to their fair value at that time, and

(b) it had immediately reacquired them for consideration of the same amount.

(2) Subsection (1) does not apply in relation to a derivative contract so far as immediately after the company ceases to be UK resident its rights and liabilities under the contract are held or owed for the purposes of a permanent establishment of the company in the United Kingdom.

(3) Subsection (1) does not apply if—

(a) the conditions in section 630(1)(a) and (b) are met in relation to the company (transferee leaving group after replacing transferor as party to derivative contract), and

(b) it ceases to be UK resident at the same time as it ceases to be a member of the relevant group.

(4) In subsection (3) “the relevant group” has the meaning given by section 630(4).

610 Non-UK resident company ceasing to hold derivative contract for UK permanent establishment U.K.

(1) This section applies if the rights and liabilities under a derivative contract of a company which is not UK resident cease to any extent 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.

(2) This Part applies as if—

(a) immediately before the rights and liabilities so cease the company had assigned them, so far as so ceasing, for consideration of an amount equal to their fair value at that time, and

(b) the company had immediately reacquired them for consideration of the same amount.

(3) This section does not apply if—

(a) the conditions in section 630(1)(a) and (b) are met in relation to the company (transferee leaving group after replacing transferor as party to derivative contract), and

(b) the rights and liabilities mentioned in subsection (1) cease to be held or owed for the purposes of the permanent establishment at the same time as the company ceases to be a member of the relevant group.

(4) In subsection (3) “the relevant group” has the meaning given by section 630(4).

611 Release under statutory insolvency arrangement of liability under derivative contract U.K.

No credit is required to be brought into account by a company in respect of the release of the company's liability to pay an amount under a derivative contract of the company if the release is part of a statutory insolvency arrangement.