Corporation Tax Act 2009

Chapter 8 Further provision about chargeable gains and derivative contracts

Company ceasing to be party to certain contracts

660 Contract relating to holding in OEIC, unit trust or offshore fund

(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 of those periods but not the first, and

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

(2) The company must bring into account for the accounting period in which it ceases to be a party to the contract the amount of any chargeable gain or allowable loss which would have been treated as accruing to it on the assumptions in subsection (3).

(3) Those assumptions are that—

(a) the company disposed of the relevant contract immediately before the beginning of the second period mentioned in subsection (1), and

(b) the disposal was for consideration of an amount equal to the value (if any) given to the relevant contract in the accounts of the company at the end of the first such period.

661 Contract which becomes derivative contract

(1) This section applies if—

(a) a company is a party to a relevant contract which (not having been a derivative contract) becomes a derivative contract, and

(b) immediately before the relevant contract becomes a derivative contract it is a chargeable asset.

(2) The company must bring into account for the accounting period in which it ceases to be a party to the relevant contract the amount of any chargeable gain or allowable loss which would have been treated as accruing to it on the assumptions in subsection (3).

(3) Those assumptions are that—

(a) the company disposed of the relevant contract immediately before the relevant time, and

(b) the disposal was for consideration of an amount equal to the notional carrying value of the relevant contract at that time.

(4) In this section “the relevant time” means the time when the relevant contract becomes a derivative contract.

(5) Section 622(4) (meaning of “notional carrying value”) applies for the purposes of this section.

Contracts ceasing to be derivative contracts

662 Contracts ceasing to be derivative contracts

(1) This section applies if a company is a party to a relevant contract which ceases to be a derivative contract.

(2) The company is treated for the purposes of corporation tax on chargeable gains as if it had acquired the contract immediately after the relevant time for consideration of an amount equal to the notional carrying value of the contract at that time.

(3) In this section “the relevant time” means the time when the contract ceases to be a derivative contract.

(4) Section 622(4) (meaning of “notional carrying value”) applies for the purposes of this section.

Carry back of net losses on certain derivative contracts

663 Contracts to which section 641 applies

(1) This section applies in the case of a company if—

(a) there are net section 641 losses for an accounting period (“the loss period”),

(b) there are net section 641 gains for a previous accounting period (“the gains period”),

(c) the gains period falls wholly or partly within the period of 24 months immediately preceding the start of the loss period, and

(d) within two years after the end of the loss period the company makes a claim in respect of the whole or a part of the net section 641 losses for the loss period.

(2) The net section 641 gains for the gains period are reduced (but not below nil) by the amount in respect of which the claim is made.

(3) And the net section 641 losses for the loss period are reduced by the amount in respect of which the claim is made.

(4) For the purposes of this section—

(a) the net section 641 gains for a later period are reduced so far as possible before the net section 641 gains for an earlier period, and

(b) where a gains period falls partly before the start of the 24 month period mentioned in subsection (1), only the appropriate fraction of the net section 641 gains for that period may be reduced.

(5) For the meaning of “net section 641 gains”, “net section 641 losses” and “the appropriate fraction”, see section 664.

664 Meaning of certain expressions in section 663

(1) This section applies for the purposes of section 663.

(2) If for an accounting period L exceeds G, there are net section 641 losses for the period of an amount equal to the excess.

(3) If for an accounting period G exceeds the sum of L and N, there are net section 641 gains for the period of an amount equal to the excess.

(4) In this section—

• G is the sum of the amounts of any chargeable gains treated as accruing to the company in the period under section 641(3)(a) in respect of derivative contracts of the company (“section 641 gains”),

• L is the sum of the amounts of any allowable losses treated as accruing to the company in the period under section 641(3)(b) in respect of derivative contracts of the company (“section 641 losses”), and

• N is the sum of the amounts of any non-section 641 losses which would fall to be deducted in the period from section 641 gains, on the assumption in subsection (5).

(5) That assumption is that, as respects the accounting period, non-section 641 losses are treated as being deducted from non-section 641 gains, so far as possible, before any remainder is deducted from section 641 gains.

(6) The “appropriate fraction” is—

where—

• A is the number of days in the gains period which fall within the 24 month period mentioned in section 663(1)(c), and

• B is the number of days in the gains period.

(7) In this section—

• “deducted” means deducted in accordance with section 8(1) of TCGA 1992 (company’s total profits to include chargeable gains),

• “the gains period” has the same meaning as in section 663,

• “non-section 641 gains” means any chargeable gains accruing to the company in the accounting period, other than section 641 gains, and

• “non-section 641 losses” means any allowable losses of the company which may be deducted in the accounting period, other than section 641 losses.

Issuers of securities with embedded derivatives: equity instruments

665 Introduction to section 666

(1) Section 666 (allowable loss treated as accruing) applies to a company for an accounting period if each of conditions A to F is met.

(2) Condition A is that the company is treated as a party to a relevant contract under section 585(2) (loan relationships with embedded derivatives) because of a debtor relationship of the company.

(3) Condition B is that the division mentioned in section 585(1) (loan relationships with embedded derivatives) in the case of the debtor relationship is between—

(a) rights and liabilities under a loan relationship, and

(b) rights and liabilities under an equity instrument of the company.

(4) Condition C is that the relevant contract is treated as an option by section 585(3) (contract treated as option, future or contract for differences).

(5) Condition D is that the company pays an amount in the accounting period to the person who is a party to the debtor relationship as creditor in discharge of any obligations under that relationship.

(6) Condition E is that at the time when the company became a party to the debtor relationship—

(a) it was not carrying on a banking business or a business as a securities house, or

(b) if it was carrying on such a business, it did not become a party to that relationship in the ordinary course of that business.

(7) Condition F is that the company is not an excluded body.

(8) In this section “option” is to be construed as if section 580(2) and (3) (meaning of “option”) were omitted.

666 Allowable loss treated as accruing

(1) If A exceeds B, an allowable loss equal to the amount of the excess is treated as accruing to the company in the accounting period for the purposes of corporation tax on chargeable gains.

(2) In this section—

• A is the amount paid as mentioned in section 665(5) reduced (but not below nil) by an amount equal to the fair value of the host contract at the time that amount is paid,

• B is the amount treated as the carrying value of the relevant contract mentioned in section 665(4) at the time the company became a party to the debtor relationship mentioned in section 665(2), and

• “the host contract” means the loan relationship to which the company is treated as a party under section 415(2) (loan relationships with embedded derivatives) because of the debtor relationship.

Treatment of shares acquired in certain circumstances

667 Shares acquired on exercise of non-embedded option

(1) This section applies if—

(a) a company is a party to a derivative contract in an accounting period,

(b) the derivative contract is a plain vanilla contract,

(c) the contract is an option,

(d) rights to acquire shares are comprised in the contract, and

(e) shares are acquired as a result of the exercise of any of those rights in the accounting period.

(2) For the purpose of calculating any chargeable gain accruing to the company on a disposal by it of all the shares so acquired, the sums allowable as a deduction under section 38(1)(a) of TCGA 1992 (acquisition costs) are—

(a) if G exceeds L, increased by the amount of that excess,

(b) if L exceeds G, reduced by the amount of that excess,

and, in the case of a part disposal of those shares, section 42(2) of that Act (part disposals) has effect accordingly.

(3) If the amount of the excess in subsection (2)(b) is greater than the amount of expenditure allowable under section 38(1)(a) of TCGA 1992, the amount of the excess which cannot be deducted from the expenditure so allowable is, for the purpose mentioned in subsection (2), added to the amount of the consideration for the disposal of the shares.

(4) For the meaning of G and L, see section 669.

668 Shares acquired on running of future to delivery

(1) This section applies if—

(a) a company is a party to a derivative contract in an accounting period,

(b) the derivative contract is a plain vanilla contract,

(c) the contract is a future, and

(d) delivery is taken of shares in accordance with the terms of the future.

(2) For the purpose of calculating any chargeable gain accruing to the company on a disposal by it of all the shares so delivered, the sums allowable as a deduction under section 38(1)(a) of TCGA 1992 (acquisition costs) are—

(a) if G exceeds L, increased by the amount of that excess,

(b) if L exceeds G, reduced by the amount of that excess,

and, in the case of a part disposal of those shares, section 42(2) of that Act (part disposals) has effect accordingly.

(3) If the amount of the excess in subsection (2)(b) is greater than the amount of expenditure allowable under section 38(1)(a) of TCGA 1992, the amount of the excess which cannot be deducted from the expenditure so allowable is, for the purpose mentioned in subsection (2), added to the amount of the consideration for the disposal of the shares.

(4) For the meaning of G and L, see section 669.

669 Meaning of G and L in sections 667 and 668

(1) This section applies for the purposes of sections 667 and 668.

(2) G is the sum of the credits brought into account under section 574 (non-trading credits and debits to be brought into account under Part 5) in respect of the derivative contract in each relevant accounting period so far as referable, on a just and reasonable apportionment, to the shares acquired as a result of the exercise of rights mentioned in section 667(1)(e) or the delivery mentioned in section 668(1)(d).

(3) L is the sum of the debits brought into account under section 574 in respect of the derivative contract in each relevant accounting period, so far as so referable.

(4) In this section “relevant accounting period” means—

(a) the accounting period in which the disposal in question is made, or

(b) any previous accounting period.

Treatment of net gains and losses on exercise of option

670 Treatment of net gains and losses on exercise of option

(1) This section applies if—

(a) a derivative contract is one to which section 645 (creditor relationships: embedded derivatives which are options) applies for an accounting period,

(b) rights to acquire shares fall to be treated as comprised in the derivative contract because of section 585(2), and

(c) any of those rights are exercised or otherwise disposed of in the accounting period.

(2) Subsection (3) applies if there is a disposal of the asset representing the creditor relationship mentioned in section 645(2).

(3) For the purpose of calculating any chargeable gain accruing to the company on the disposal, the sums allowable as a deduction under section 38(1)(a) of TCGA 1992 (acquisition costs) are—

(a) if the sum of G and CV exceeds L, increased by the amount of that excess,

(b) if L exceeds the sum of G and CV, reduced by the amount of that excess.

(4) Subsection (5) applies if there is a disposal of all or any of the shares (“the relevant shares”) acquired—

(a) as a result of the exercise of rights mentioned in subsection (1)(c), and

(b) in circumstances where a disposal is deemed not to occur because of section 127 of TCGA 1992 (equation of original shares and new holding).

(5) For the purpose of calculating any chargeable gain accruing to the company on a disposal of all the relevant shares, the sums allowable as a deduction under section 38(1)(a) of TCGA 1992 (acquisition costs) are—

(a) if the sum of G and CV exceeds L, increased by the amount of that excess,

(b) if L exceeds the sum of G and CV, reduced by the amount of that excess,

and, in the case of a part disposal of those shares, section 42(2) of that Act (part disposals) has effect accordingly.

(6) If the amount of the excess in subsection (3)(b) or (5)(b) is greater than the amount of expenditure allowable under section 38(1)(a) of TCGA 1992, the amount of the excess which cannot be deducted from the expenditure so allowable is, for the purpose mentioned in subsection (3) or (5) (as the case may be), added to the amount of the consideration for the disposal so mentioned.

(7) Sections 37 and 39 of TCGA 1992 (consideration chargeable to tax on income and exclusion of expenditure by reference to tax on income) do not apply in relation to a disposal mentioned in subsection (2) or (4) above.

(8) For the meaning of G, L and CV, see section 671.

671 Meaning of G, L and CV in section 670

(1) This section applies for the purposes of section 670.

(2) G is the sum of the amounts of any chargeable gains treated as accruing to the company under section 641(3)(a) (derivative contracts to be taxed on a chargeable gains basis) in respect of the derivative contract in each relevant accounting period, so far as referable, on a just and reasonable apportionment, to the shares acquired as a result of the exercise of rights mentioned in section 670(1)(c).

(3) L is the sum of the amounts of any allowable losses treated as accruing to the company under section 641(3)(b) in respect of the derivative contract in each relevant accounting period, so far as so referable.

(4) CV is the amount by which the carrying value of the host contract at the date on which the option is exercised exceeds the carrying value of that contract at—

(a) the date on which the company became a party to the creditor relationship mentioned in section 645(2), or

(b) (if later) the date on which the derivative contract became one to which section 645 applies.

(5) In this section—

• “the host contract” means the loan relationship to which the company is treated as a party under section 415(2) (loan relationships with embedded derivatives) because of the creditor relationship mentioned in section 645(2), and

• “relevant accounting period” means—

  (a)

  the accounting period in which the disposal in question is made, or

  (b)

  any previous accounting period.

Treatment of net gains and losses on disposal of certain embedded derivatives

672 Treatment of net gains and losses on disposal of certain embedded derivatives

(1) This section applies if—

(a) a derivative contract is one to which section 648 (creditor relationships: embedded derivatives which are exactly tracking contracts for differences) applies for an accounting period, and

(b) the asset representing the creditor relationship mentioned in section 648(2) is disposed of in the accounting period.

(2) For the purpose of calculating any chargeable gain accruing to the company on the disposal, the sums allowable as a deduction under section 38(1)(a) of TCGA 1992 (acquisition costs) are—

(a) if the sum of G and CV exceeds L, increased by the amount of that excess,

(b) if L exceeds the sum of G and CV, reduced by the amount of that excess.

(3) If the amount of the excess in subsection (2)(b) is greater than the amount of expenditure allowable under section 38(1)(a) of TCGA 1992, the amount of the excess which cannot be deducted from the expenditure so allowable is, for the purpose mentioned in subsection (2), added to the amount of the consideration for the disposal.

(4) Sections 37 and 39 of TCGA 1992 (consideration chargeable to tax on income and exclusion of expenditure by reference to tax on income) do not apply in relation to the disposal.

(5) For the meaning of G, L and CV, see section 673.

673 Meaning of G, L and CV in section 672

(1) This section applies for the purposes of section 672.

(2) G is the sum of the amounts of any chargeable gains treated as accruing to the company under section 641(3)(a) (derivative contracts to be taxed on a chargeable gains basis) in respect of the derivative contract in each relevant accounting period.

(3) L is the sum of the amounts of any allowable losses treated as accruing to the company under section 641(3)(b) in respect of the derivative contract in each relevant accounting period.

(4) CV is the amount by which the carrying value of the host contract at the date of the disposal exceeds the carrying value of that contract at the date on which the company became a party to the creditor relationship mentioned in section 648(2).

(5) In this section—

• “the host contract” means the loan relationship to which the company is treated as a party under section 415(2) (loan relationships with embedded derivatives) because of the creditor relationship mentioned in section 648(2), and

• “relevant accounting period” means—

  (a)

  the accounting period in which the disposal is made, or

  (b)

  any previous accounting period.