The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) Regulations 2004

Statutory Instruments

2004 No. 3256

INCOME TAX

The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) Regulations 2004

Made

9th December 2004

Laid before the House of Commons

10th December 2004

Coming into force

1st January 2005

The Treasury, in exercise of the powers conferred upon them by sections 84A(3A), 85B(3)(a) and 85B(5)(b) of the Finance Act 1996(1) and paragraphs 16(3A), 17C(1) and 17C(3)(b) of Schedule 26 to the Finance Act 2002(2) make the following Regulations:

Citation, commencement and effect U.K.

1.—(1) These Regulations may be cited as the Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) Regulations 2004 and shall come into force on 1^st January 2005.

(2) These Regulations have effect in relation to periods of account beginning on or after 1^st January 2005.

Commencement Information

I1 Reg. 1 in force at 1.1.2005, see reg. 1(1)

Interpretation U.K.

2.—(1) In these Regulations—

[F1 “Additional Tier 1 instrument” means an instrument which qualifies as an Additional Tier 1 instrument under Article 52 of the Commission Regulation (EU) No 575/2013;]

[F1 “deferred shares” has the same meaning as in the Building Societies Act 1986;]

“derivative contract” has the same meaning as in Schedule 26 to the Finance Act 2002;

[F2 “exchange gain or loss” has the same meaning as in paragraph 54 of Schedule 26 to the Finance Act 2002;]

“fair value accounting” has the meaning given in section 103 of the Finance Act 1996(3);

“fair value profit or loss” means the profit or loss brought into account in relation to a derivative contract or an asset or liability representing a loan relationship where for the period in question fair value accounting is used, and where fair value accounting is used in relation to only part of a contract it means the profit or loss brought into account in relation to that part;

[F3 “loan relationship” has the same meaning as in section 81 of the Finance Act 1996;]

[F3 “a paragraph 50A credit or debit” means the credit or debit to be brought into account in accordance with paragraph 50A of Schedule 26 to the Finance Act 2002;]

[F3 “a prior period adjustment credit or debit” means so much of any credit or debit as represents a prior period adjustment taken into account by virtue of paragraph 17B(1)(b) of Schedule 26 to the Finance Act 2002 as a result of a change of accounting basis;]

“underlying subject matter” has the same meaning as in Schedule 26 to the Finance Act 2002.

(2) In these Regulations—

“for accounting purposes” means for the purposes of accounts drawn up in accordance with generally accepted accounting practice;

“generally accepted accounting practice” has the meaning given in section 50 of the Finance Act 2004(4); and

“amortised cost”[F4 , consolidated accounts], “designated”, “effective hedge”, “effective interest method”, “firm commitment”, “forecast transaction”, “foreign operation” and “net investment in a foreign operation” have the same meaning as for accounting purposes.

(3) In these Regulations any reference to an asset which is a ship or aircraft includes a reference to a contract—

(a) to which section 67 of the Capital Allowances Act 2001(5) applies; and

(b) which relates to plant or machinery which is a ship or aircraft.

[F5 (3A) For the purposes of these Regulations, a liability representing a loan relationship or a derivative contract is treated as matched with shares, ships or aircraft from the date that, and to the extent that, either condition 1 or 2 of regulation 3(3) or 4(3) are satisfied.]

(4) In these Regulations—

(a) any reference to a hedging instrument includes a reference to part of an instrument; and

(b) any reference to a hedged item includes a reference to part of a hedged item.

(5) For the purposes of these Regulations, a company has a hedging relationship between a derivative contract or a liability representing a loan relationship on the one hand (“the hedging instrument”) and an asset, liability, receipt or expense on the other (“the hedged item”) if and to the extent that—

(a) the hedging instrument and the hedged item are designated by the company as a hedge; or

(b) in any other case the hedging instrument is intended to act as a hedge of—

(i) the exposure to changes in fair value of a hedged item which is a recognised asset or liability or an unrecognised firm commitment or an identified portion of such an asset, liability or commitment that is attributable to a particular risk and could affect profit or loss of the company;

(ii) the exposure to variability in cash flows that is attributable to a particular risk associated with a hedged item that is a recognised asset or liability or a forecast transaction and could affect profit or loss of the company; or

(iii) a net investment in a foreign operation of the company.

[F6 (6) For the purposes of regulations 3 to 5, where an asset referred to is shares in a company, the asset comprises all the shares held in that company whenever acquired.]

Textual Amendments

F1 Words in reg. 2(1) inserted (21.11.2013 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2013 (S.I. 2013/2781), regs. 1(1), 2(2)

F2 Words in reg. 2(1) substituted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 3(a)

F3 Words in reg. 2(1) inserted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 3(b)

F4 Words in reg. 2(2) inserted (27.12.2007 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2007 (S.I. 2007/3431), regs. 1(1), 2(2)(a)

F5 Reg. 2(3A) inserted (6.12.2011 at 11.45 a.m. with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2011 (S.I. 2011/2912), regs. 1(1), 3

F6 Reg. 2(6) inserted (27.12.2007 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2007 (S.I. 2007/3431), regs. 1(1), 2(2)(b)

Commencement Information

I2 Reg. 2 in force at 1.1.2005, see reg. 1(1)

Exchange gains or losses arising from liabilities or assets hedging shares etc. U.K.

3.—(1) For the purposes of section 84A(3A) of the Finance Act 1996 there is prescribed an exchange gain or loss arising to a company in an accounting period in relation to a liability representing a loan relationship of the company which is matched with the whole or part of any shares, ships or aircraft.

[F7 (1ZA) But where the matched shares, ships or aircraft are matched after the company became party to the loan relationship, paragraph (1) only applies to a just and reasonable proportion of any exchange gain or loss having regard to—

(a) the fraction of the accounting period for which the shares, ships or aircraft are matched with the loan relationship,

(b) the fraction of the accounting period for which the company was party to the loan relationship, and

(c) fluctuations in exchange rates during the accounting period.]

[F8 (1A) For the purposes of paragraph (1) a liability representing a loan relationship does not include any liability representing a relationship within section 100(1) of the Finance Act 1996.]

(2) This regulation does not apply if movements in the fair value [F9 , or profits or losses arising on the disposal,] of any shares, ships or aircraft which are an asset falling within regulation 3(1) are brought into account by the company in computing, for the purposes of corporation tax, the profits of a trade carried on by it which consists of or includes dealing in shares, ships or aircraft.

[F10 (3)  Shares, ships or aircraft are matched to the greatest possible extent with—

(a)

the liability representing the loan relationship designated as a hedge if condition 1 is satisfied;

(b)

subject to paragraph (a), the liability representing the loan relationship referred to in condition 2 if that condition is satisfied;]

F11 ...

Condition [F12 1]

The condition is that F13 ... the shares, ships or aircraft are a hedged item under a designated hedge of exchange rate risk in which the liability is the hedging instrument.

Condition [F14 2]

The condition is that the currency in which the liability is expressed is such that the company [F15 intends], by entering into [F16 [F17 or] continuing to be subject to] that liability, F18 ... to eliminate or substantially reduce the economic risk of holding the asset, or part of the asset, which is attributable to fluctuations in exchange rates.

(4) If [F19 condition 2] applies, a liability is matched with an asset only to the extent that the carrying value of the liability F20 ... does not exceed the unmatched carrying value of the asset at [F21 the relevant time].

(5) For the purposes of section 84A(3A) of the Finance Act 1996 there is prescribed an exchange gain or loss arising to a company in an accounting period in relation to an asset representing a loan relationship of the company which is matched with the whole or part [F22 of—

(a) any share capital of the company,

(b) in relation to a building society, any deferred shares issued by the building society to the extent that they are accounted for as equity instruments in accordance with generally accepted accounting practice, or

(c) any Additional Tier 1 instrument issued by the company to the extent that it is accounted for as an equity instrument in accordance with generally accepted accounting practice.]

(6) An asset is matched with share capital [F23 in particular where] for the accounting period of the company immediately preceding the first accounting period to which these Regulations apply—

(a) exchange gains and losses on the asset were taken to a reserve; and

(b) set off there against exchange gains and losses on the share capital.

(7) In this regulation—

“carrying value” means, in relation to a liability, the [F24 relevant value] of that liability; and

“unmatched carrying value” means, in relation to an asset, an amount equal to the value as shown in the company’s accounts to the extent that that amount has not previously been matched in accordance with this regulation or regulation 4.

Textual Amendments

F7 Reg. 3(1ZA) inserted (6.12.2011 at 11.45 a.m. with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2011 (S.I. 2011/2912), regs. 1(1), 4(1)

F8 Reg. 3(1A) inserted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 4(2)

F9 Words in reg. 3(2) inserted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 4(3)

F10 Words in reg. 3(3) substituted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 4(4)(a)

F11 Words in reg. 3(3) omitted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by virtue of The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 4(4)(b)

F12 Reg. 3(3): Condition 2 renumbered as Condition 1 (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 4(4)(d)(i)

F13 Words in reg. 3(3) omitted (6.12.2011 at 11.45 a.m. with effect in accordance with reg. 1(2) of the amending S.I.) by virtue of The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2011 (S.I. 2011/2912), regs. 1(1), 4(2)

F14 Reg. 3(3): Condition 3 renumbered as Condition 2 (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 4(4)(d)(ii)

F15 Word in reg. 3(3) substituted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 4(4)(c)(i)

F16 Words in reg. 3(3) inserted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 4(4)(c)(ii)

F17 Word in reg. 3(3) substituted (1.4.2011 in relation to accounting periods beginning on or after that date) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2011 (S.I. 2011/698), regs. 1, 3

F18 Words in reg. 3(3) omitted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by virtue of The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 4(4)(c)(iii)

F19 Words in reg. 3(4) substituted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 4(5)(a)

F20 Words in reg. 3(4) omitted (27.12.2007 with effect in accordance with reg. 1(2) of the amending S.I.) by virtue of The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2007 (S.I. 2007/3431), regs. 1(1), 2(3)(a)

F21 Words in reg. 3(4) substituted (27.12.2007 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2007 (S.I. 2007/3431), regs. 1(1), 2(3)(b)

F22 Words in reg. 3(5) substituted (21.11.2013 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2013 (S.I. 2013/2781), regs. 1(1), 2(3)

F23 Words in reg. 3(6) substituted (29.12.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2005 (S.I. 2005/3374), regs. 1(1), 4

F24 Words in reg. 3(7) substituted (29.12.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2005 (S.I. 2005/3374), regs. 1(1), 3

Commencement Information

I3 Reg. 3 in force at 1.1.2005, see reg. 1(1)

Exchange gains or losses arising from derivative contracts hedging shares etc. U.K.

4.—(1) For the purposes of paragraph 16(3A) and 17C(1)(a) of Schedule 26 to the Finance Act 2002 there is prescribed an exchange gain or loss arising to a company in an accounting period in relation to a derivative contract of the company which is matched with the whole or part of any shares, ships or aircraft.

[F25 (1A) But where the matched shares, ships or aircraft are matched after the company became party to the derivative contract, paragraph (1) only applies to a just and reasonable proportion of any exchange gain or loss having regard to—

(a) the fraction of the accounting period for which the shares, ships or aircraft are matched with the derivative contract,

(b) the fraction of the accounting period for which the company was party to the derivative contract, and

(c) fluctuations in exchange rates during the period.]

(2) This regulation does not apply if movements in the fair value [F26 , or profits or losses arising on the disposal,] of any shares, ships or aircraft which are an asset falling within regulation 4(1) are brought into account by the company in computing, for the purposes of corporation tax, the profits of a trade carried on by it which consists of or includes dealing in shares, ships or aircraft.

(3) [F27 Shares, ships or aircraft are matched to the greatest possible extent with—]

(a)

the derivative contract designated as a hedge if condition 1 is satisfied;

(b)

subject to paragraph (a), the derivative contract referred to in condition 2 if that condition is satisfied.

F28 ...

Condition [F29 1]

The condition is that F30 ... the shares, ships or aircraft are a hedged item under a designated hedge of exchange rate risk in which the derivative contract is the hedging instrument.

Condition [F31 2]

The condition is that the underlying subject matter of the derivative contract is such that the company [F32 intends], by entering into [F33 [F34 or] continuing to be party to] that contract, F35 ... to eliminate or substantially reduce the economic risk of holding the asset, or part of the asset, which is attributable to fluctuations in exchange rates.

(4) If [F36 condition 2] applies, a derivative contract is matched with an asset only to the extent that the [F37 value of the obligation under] the derivative contract F38 ... does not exceed the unmatched carrying value of the asset at [F39 the relevant time].

[F40 (4A) For the purposes of paragraph 16(3A) of Schedule 26 to the Finance Act 2002 there is prescribed an exchange gain or loss arising to a company in an accounting period in relation to a derivative contract of the company which is matched with the whole or part [F41 of—

(a) any share capital of the company,

(b) in relation to a building society, any deferred shares issued by the building society to the extent that they are accounted for as equity instruments in accordance with generally accepted accounting practice, or

(c) any Additional Tier 1 instrument issued by the company to the extent that it is accounted for as an equity instrument in accordance with generally accepted accounting practice.]

(4B) A derivative contract is matched with share capital in particular where for the accounting period of the company immediately preceding the first accounting period beginning on or after 1st January 2005—

(a) exchange gains and losses on the derivative contract were taken to a reserve; and

(b) set off there against exchange gains and losses on the share capital.]

(5) In this regulation—

F42 ...

“unmatched carrying value” means, in relation to an asset, an amount equal to the [F43 relevant value] to the extent that that amount has not previously been matched in accordance with this regulation or regulation 3.

[F44 “the value of the obligation under the derivative contract” means the value of the obligation of the company to pay in exchange for one currency an amount of a second currency and includes any notional obligation to pay an amount of currency in respect of a contract for differences.]

Textual Amendments

F25 Reg. 4(1A) inserted (6.12.2011 at 11.45 a.m. with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2011 (S.I. 2011/2912), regs. 1(1), 5(1)

F26 Words in reg. 4(2) inserted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 5(2)

F27 Words in reg. 4(3) substituted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 5(3)(a)

F28 Words in reg. 4(3) omitted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by virtue of The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 5(3)(b)

F29 Reg. 4(3): Condition 2 renumbered as Condition 1 (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 5(3)(d)(i)

F30 Words in reg. 4(3) omitted (6.12.2011 at 11.45 a.m. with effect in accordance with reg. 1(2) of the amending S.I.) by virtue of The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2011 (S.I. 2011/2912), regs. 1(1), 5(2)

F31 Reg. 4(3): Condition 3 renumbered as Condition 2 (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 5(3)(d)(ii)

F32 Word in reg. 4(3) substituted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 5(3)(c)(i)

F33 Words in reg. 4(3) inserted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 5(3)(c)(ii)

F34 Word in reg. 4(3) substituted (1.4.2011 in relation to accounting periods beginning on or after that date) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2011 (S.I. 2011/698), regs. 1, 4

F35 Words in reg. 4(3) omitted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by virtue of The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 5(3)(c)(iii)

F36 Words in reg. 4(4) substituted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 5(4)(a)

F37 Words in reg. 4(4) substituted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 5(4)(b)

F38 Words in reg. 4(4) omitted (27.12.2007 with effect in accordance with reg. 1(2) of the amending S.I.) by virtue of The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2007 (S.I. 2007/3431), regs. 1(1), 2(4)(a)

F39 Words in reg. 4(4) substituted (27.12.2007 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2007 (S.I. 2007/3431), regs. 1(1), 2(4)(b)

F40 Reg. 4(4A)(4B) inserted (29.12.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2005 (S.I. 2005/3374), regs. 1(1), 5

F41 Words in reg. 4(4A) substituted (21.11.2013 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2013 (S.I. 2013/2781), regs. 1(1), 2(3)

F42 Words in reg. 4(5) omitted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by virtue of The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 5(5)(a)

F43 Words in reg. 4(5) substituted (29.12.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2005 (S.I. 2005/3374), regs. 1(1), 3

F44 Words in reg. 4(5) inserted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 5(5)(b)

Commencement Information

I4 Reg. 4 in force at 1.1.2005, see reg. 1(1)

[F45 Relevant value U.K.

4A.— (1) For the purposes of regulations 3(7) and 4(5), “relevant value” means—

(a) in relation to shares held by the company in another company (“Company A”), where the company elects, the higher of—

(i) the net asset value underlying the shares in Company A, and

(ii) the value shown in the accounts of the company; and

(b) in any other case, the value shown in the accounts of the company.

(2) In paragraph (1)(a)(i) the net asset value underlying the shares in Company A is an amount equal to—

(a) the value of the assets, less

(b) the value of the liabilities

of Company A and any direct or indirect subsidiary of Company A denominated in the relevant currency.

This is subject to paragraph (6).

(3) The value of assets and liabilities referred to in paragraph (2) is the value at the relevant time shown in—

(a) a balance sheet of Company A, or

(b) where Company A has a direct or indirect subsidiary, a notional consolidated balance sheet of Company A prepared in the relevant currency.

(4) For the purposes of paragraph (3) in determining whether an asset or liability would be recognised in the balance sheet or notional consolidated balance sheet and, if so recognised the value that would be accorded to it, regard shall be had to the accounting treatment of the asset or liability—

(a) in any consolidated accounts prepared by the company, or

(b) where the company does not prepare consolidated accounts, in any consolidated accounts prepared by a company that directly or indirectly controls the company.

(5) Nothing in paragraphs (3) or (4) shall prevent an asset or liability, which might be eliminated in the preparation of any consolidated accounts, from being taken into account in paragraph (2).

(6) If the company does not directly hold the entire issued share capital in Company A, the net asset value underlying the shares in Company A shall be reduced by such amount as is just and reasonable having regard to—

(a) the proportion of the issued shares held by the company, and

(b) where there is more than one class of share, the rights attached to the shares held by the company.

(7) An election under paragraph (1)—

(a) is irrevocable,

(b) applies to all the shareholdings held by the company which are matched in accordance with regulation 3(3)(b) or 4(3)(b),

(c) has effect from the beginning of the accounting period in which the election is made,

(d) must be made in writing to Her Majesty’s Revenue and Customs within the time limit specified in paragraph (8), and

(e) must specify the review period.

[F46 This is subject to paragraph (8A).]

(8) The time limit for making an election is—

(a) in relation to shares held on and before the start of the first accounting period beginning on or after 1st January 2008, the later of—

(i) 31st March 2008, and

(ii) 30 days from the start of that accounting period; and

(b) in any other case, within 30 days of shares being matched in accordance with regulation 3(3)(b) or 4(3)(b).

[F47 (8A) Where a company has made an election before 1st April 2011 and has specified a review period of 92 days or less, it may amend that election to increase the length of the review period specified.

(8B) An amendment to an election must be made by 1st June 2011 by notice in writing to Her Majesty’s Revenue and Customs.]

[F48 (9)]  In this regulation—

“relevant currency” means the currency which, as a result of exchange rate fluctuations, gives rise to the economic risk referred to in regulations 3(3) and 4(3);

“control” has the meaning given in section 840 of the Income and Corporation Taxes Act 1988(7).]

Textual Amendments

F45 Regs. 4A-4C substituted for reg. 4A (27.12.2007 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2007 (S.I. 2007/3431), regs. 1(1), 2(5)

F46 Words in reg. 4A(7) inserted (1.4.2011 in relation to accounting periods beginning on or after that date) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2011 (S.I. 2011/698), regs. 1, 5(2)

F47 Reg. 4A(8A)(8B) inserted (1.4.2011 in relation to accounting periods beginning on or after that date) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2011 (S.I. 2011/698), regs. 1, 5(3)

F48 Second reg. 4A(6) renumbered as reg. 4A(9) (1.4.2011 in relation to accounting periods beginning on or after that date) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2011 (S.I. 2011/698), regs. 1, 5(4)

[F45 Relevant time U.K.

4B.— (1) For the purposes of regulations 3(4), 4(4) and 4A(“relevant time” is determined as follows.

(2) In a case within regulation 4A(1)(a) (relevant value determined by net asset value) the relevant time is the start of each review period in an accounting period.

(3) In a case within regulation 4A(1)(b) (relevant value determined by accounts value), the relevant time is the time when the liability or contract is entered into or, if later, when the asset is acquired.]

Textual Amendments

F45 Regs. 4A-4C substituted for reg. 4A (27.12.2007 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2007 (S.I. 2007/3431), regs. 1(1), 2(5)

[F49 Review period U.K.

4C.— (1) For the purposes of regulations 4A(7)(e) and 4B(2), a review period is a period, or one of a series of successive periods, of a length specified by a company making an election in accordance with regulation 4A(1)(a).

This is subject to the provisions of this regulation.

(2) A review period, or where more than one in an accounting period the first review period in that accounting period, begins on the first day of the accounting period or, if later, the date that a liability or derivative contract first becomes matched with shares in accordance with regulation 3(3)(b) or 4(3)(b).

(3) A review period, or where more than one in an accounting period the last review period in that accounting period, must end on the last day of the accounting period.

(4) If a company has matched shares in accordance with regulation 3(3)(b) or 4(3)(b) (“the first asset”), the first review period in relation to shares which are subsequently matched—

(a) begins when the subsequent matching occurs, and

(b) ends at the same time as the review period which is current in relation to the first asset when the subsequent matching occurs.

(5) If during a review period (“the current period”) there is a significant variation in the net asset value underlying shares which have been matched in accordance with regulation 3(3)(b) or 4(3)(b), there shall be a new review period in relation to those shares which—

(a) begins on the day that any variation in the net asset value becomes a significant variation, and

(b) ends at the same time as the current period.

(6) In paragraph (5) “significant variation” means an increase or decrease of 10% or more in the net asset value underlying the matched shares.

(7) In this regulation the net asset value underlying shares shall be determined in accordance with regulation 4A(2).]

Textual Amendments

F49 Reg. 4C substituted (1.4.2011 in relation to accounting periods beginning on or after that date) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2011 (S.I. 2011/698), regs. 1, 6

Regulations 3 and 4: supplementary U.K.

5.—(1) Where in any accounting period—

(a) a company holds more than one asset in relation to which there are amounts of exchange gains and losses falling within regulations 3 or 4; and

(b) the currency—

(i) in which the assets are denominated and the liability [F50 mentioned in regulation 3(1)] expressed; or

(ii) which is the underlying subject matter of the derivative contract [F51 mentioned in regulation 4(1)] ,

is the same currency, F52 ... [F53 the extent to which an asset is matched is determined in accordance with the following rules].

[F54 Rule 1

Liabilities and contracts are regarded as matched to the greatest possible extent with assets which are ships or aircraft.]

Rule 2

Subject to Rule 1, liabilities and contracts are regarded as matched to the greatest possible extent with assets on the disposal of which a chargeable gain would accrue [F55 if the disposal were made on a date falling more than 12 months after the date of acquisition of the asset].

Rule 3

Subject to Rules 1 and 2, liabilities [F56 and contracts] are regarded as matched with assets on a disposal of which no chargeable gain would be treated as accruing by virtue of Part 1 of Schedule 7AC to the Taxation of Chargeable Gains Act 1992(6) F57 ....

(2) If—

(a) part only of a liability falling within the third condition in regulation 3, or

(b) part only of a contract falling within the third condition in regulation 4,

could reasonably be expected to eliminate or substantially reduce the economic risk of holding the asset which is attributable to fluctuations in exchange rates, the liability or contract is to be treated as being matched with a corresponding amount of value of an asset.

(3) For the purposes of paragraph (1), a currency in which a liability is expressed or which is the underlying subject matter of a derivative contract, is to be treated, if it is not the case, as the same currency in which an asset is denominated if—

(a) borrowing in that currency, or

(b) the obligation to deliver that currency,

could reasonably be expected to eliminate or substantially reduce the economic risk of holding the asset, or part of the asset, which is attributable to fluctuations in exchange rates.

(4) Where regulation 3 or section 84A(3) of the Finance Act 1996 applies to a company in an accounting period in relation to a liability representing a loan relationship there is prescribed, for the purposes of regulation 3 or section 84A(3A) of that Act, an exchange gain or loss treated by virtue of paragraph 6D(2) of Schedule 28AA to the Taxes Act 1988(7) as arising in that accounting period to another company in relation to the same loan relationship.

Textual Amendments

F50 Words in reg. 5(1)(b)(i) inserted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 6(2)(a)

F51 Words in reg. 5(1)(b)(ii) inserted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 6(2)(b)

F52 Words in reg. 5(1)(b) omitted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by virtue of The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 6(2)(c)

F53 Words in reg. 5(1) added (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 6(3)

F54 Words in reg. 5(1) substituted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 6(4)

F55 Words in reg. 5(1) inserted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 6(5)

F56 Words in reg. 5(1) inserted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 6(6)(a)

F57 Words in reg. 5(1) revoked (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 6(6)(b)

Commencement Information

I5 Reg. 5 in force at 1.1.2005, see reg. 1(1)

Rules about fair value profits and losses U.K.

6.—(1) Regulations 7, [F58 7A,] 8 and 9 contain specific rules about excluding fair value profits and losses for the purposes of Schedule 26 to the Finance Act 2002.

(2) For the purposes of regulations 7, [F59 7A,] 8 and 9 it is immaterial that the hedging relationship is not an effective hedge for accounting purposes.

(3) A company may elect that—

(a) regulation 7 shall not apply to its currency contracts which satisfy the conditions contained in regulation [F60 7(1)]; and

(b) regulation 8 shall not apply to its commodity contracts or debt contracts which satisfy the conditions contained in that regulation.

[F61 (3A) A company may elect that regulation 9A shall apply to—

(a) its currency contracts which satisfy the conditions contained in regulation 7(1), and

(b) its commodity or debt contracts which satisfy the conditions contained in regulation 8(1).]

(4) Any election made under paragraph (3) [F62 or (3A)] shall apply to—

(a) all of the currency contracts entered into by the company which satisfy the conditions contained in regulation [F63 7(1)]; and

(b) all of the commodity contracts or debt contracts entered into by the company which satisfy the conditions contained in regulation 8(1).

(5) [F64 Subject to paragraph (5A)] a company may elect that regulation 9 shall not apply to its interest rate contracts which satisfy the conditions contained in that regulation [F65 but that regulation 9A shall apply,] and any election under this regulation shall apply to all of the interest rate contracts entered into by the company which satisfy the conditions contained in regulation 9(1).

[F66 (5A) An election under paragraph (5) has no effect in relation to interest rate contracts—

(a) where—

(i) the contract or a portion of the contract (“the hedging instrument”) is designated as a hedge in respect of any risks arising in respect of an asset, liability, receipt or expense (“the hedged item”);

(ii) fair value profits or losses arising on the hedged item or in relation to any of the risks [F67 , in relation to which the contract was intended to act as a hedge,] arising in respect of the hedged item, or any portion of the hedged item, are not brought into account for the purposes of corporation tax for that period; and

(iii) fair value profits or losses arising on the hedging instrument are not recognised in the company’s statement of recognised gains and losses or statement of changes in equity;

or

(b) where the hedged item is a loan relationship to which section 87(1) of the Finance Act 1996 applies.]

[F68 (5B) Subject to paragraph (5C), a company may elect that regulation 9 shall not apply to its interest rate contracts which satisfy the conditions contained in that regulation but that regulation 9A shall apply, and any election under this regulation shall apply to all of the interest rate contracts entered into by the company which satisfy the conditions contained in regulation 9(1).

(5C) An election under paragraph (5B) has no effect in relation to interest rate contracts—

(a) where the conditions in paragraph (5A)(a) are met; or

(b) where the hedged item is an asset representing a loan relationship—

(i) to which section 87(1) of the Finance Act 1996 applies, and

(ii) in relation to which the company uses fair value accounting.]

(6) Subject to paragraph [F69 (6A) and] (7), an election under paragraph (3) or (5) shall be made [F70 before—

(a) 1st October 2005 in the case of an election under paragraph (3), or

(b) 31st March 2006 in the case of an election under paragraph (5),

and has effect for that accounting period and all subsequent accounting periods unless, in the case of an election under paragraph (3), revoked.]

[F71 (6A) In any case where a company—

(a) does not use fair value accounting in relation to its derivative contracts for an accounting period beginning on or after 1st January 2005, and

(b) begins to use fair value accounting in a subsequent accounting period (“the subsequent period”) in relation to contracts to which regulations 7 or 8, or regulation 9 apply and to which it is a party at the start of that period,

an election under paragraph [F72 (3), (3A), (5) or (5A)] shall be made before the start of the subsequent period.]

[F73 This paragraph does not apply to cases within paragraph (7).]

(7) In any case where a company is not a party to any contracts to which regulations 7 or 8, or regulation 9 apply immediately before the start of the company’s first accounting period to which the Regulations apply, an election [F74 under] paragraph [F75 (3), (3A), (5) or (5A)] shall be made within 90 days of the company entering into its first contract to which regulation 7 or 8, or regulation 9 applies, as the case may be [F76 or, if later, 31st March 2006].

[F77 (7A) An election under paragraph (3A) or (5B)—

(a) must be made before the later of—

(i) 1st April 2007, and

(ii) the date determined by paragraph (6A) or (7) as the date before which an election must be made;

(b) must be made in writing to Her Majesty’s Revenue and Customs;

(c) is irrevocable; and

(d) applies in relation to accounting periods beginning on or after 1st January 2006.

(7B) An election—

(a) under paragraph (3A) revokes any previous election under paragraph (3);

(b) under paragraph (5B) revokes any previous election under paragraph (5).]

(8) A company may revoke an election under paragraph (3) F78 ... with effect from the date on which notice is given of it, but contracts entered into before that date shall not be affected.

(9) An election under paragraph (3) F79 ... shall be made, and may be revoked by the company which made it, by notice in writing to F80 ... [F81 Her Majesty’s Revenue and Customs].

[F82 (9A) An election under paragraph (5) shall be made in writing to Her Majesty’s Revenue and Customs and is irrevocable [F83 except where revoked by an election made under paragraph (5B)].]

(10) If—

(a) a company (“the electing company”) makes an election under paragraph [F84 (3), (3A), (5) or (5B)] in relation to its contracts;

(b) any other company which is a party to a derivative contract to which the election applies is a member of the same group of companies as the electing company; and

(c) that other company has not made an election under paragraph [F85 (3), (3A), (5) or (5B)] in relation to the contract, as the case may be,

then the other company is to be treated as if it had made the election but only in relation to that contract.

(11) Paragraph (10) does not apply if the electing company, or the other company, entered into the contract in the ordinary course of a banking business or a business as a securities house.

(12) If a contract to which regulation 7, 8 or 9 applies is transferred by a company in circumstances to which paragraph 28 of Schedule 26 to the Finance Act 2002(8) would apply but for paragraph 30(9) of that Schedule—

(a) paragraph 30 shall not apply (and accordingly paragraph 28 shall apply) [F86 and paragraph 50A(3B) of that Schedule shall be modified in accordance with paragraph (12A)]; and

(b) the transferee company is to be treated as not having made the election under paragraph [F87 (3), (3A), (5) or (5B)] as the case may be (“the relevant election”) in relation to that contract, if it has made a relevant election in relation to all of its contracts.

[F88 (12A) The modification to paragraph 50A(3B) of Schedule 26 to the Finance Act is as follows—

(a) in paragraph (a) delete “and”;

(b) after paragraph (b) insert—

“, and

(c) regulations 7, 8 and 9 of the Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) Regulations 2004.”.]

(13) If a company (“the electing company”) makes an election under paragraph [F89 (3), (3A), (5) or (5B)] in relation to its contracts—

(a) a contract to which the election applies is transferred to another company (“the transferee company”) in circumstances to which paragraph 28 of Schedule 26 to the Finance Act 2002 applies, or

(b) would apply but for paragraph 30 of that Schedule,

and the transferee company has not made an election under paragraph [F89 (3), (3A), (5) or (5B)] in relation to the contract as the case may be, then the transferee company is to be treated as if it had made the election but only in relation to that contract.

(14) In this Regulation—

“group of companies” shall be construed in accordance with section 170 of the Taxation of Chargeable Gains Act 1992(10); and

“securities house” means a person—

(a)

who is authorised for the purposes of the Financial Services and Markets Act 2000(11); and

(b)

whose business consists wholly or mainly of dealing as a principal in financial instruments within the meaning of section 349(5) and (6) of the Taxes Act 1988(12).

Textual Amendments

F58 Word in reg. 6(1) inserted (5.8.2009 with application and effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2009 (S.I. 2009/1886), regs. 1(1), 4

F59 Word in reg. 6(2) inserted (5.8.2009 with application and effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2009 (S.I. 2009/1886), regs. 1(1), 4

F60 Word in reg. 6(3)(a) substituted (29.12.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2005 (S.I. 2005/3374), regs. 1(1), 7(2)

F61 Reg. 6(3A) inserted (27.12.2006 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2006 (S.I. 2006/3236), regs. 1(1), 3(2)

F62 Words in reg. 6(4) inserted (27.12.2006 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2006 (S.I. 2006/3236), regs. 1(1), 3(3)

F63 Word in reg. 6(4)(a) substituted (29.12.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2005 (S.I. 2005/3374), regs. 1(1), 7(2)

F64 Words in reg. 6(5) inserted (29.12.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2005 (S.I. 2005/3374), regs. 1(1), 7(3)(a)

F65 Words in reg. 6(5) inserted (29.12.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2005 (S.I. 2005/3374), regs. 1(1), 7(3)(b)

F66 Reg. 6(5A) inserted (29.12.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2005 (S.I. 2005/3374), regs. 1(1), 7(4)

F67 Words in reg. 6(5A)(a)(ii) inserted (27.12.2006 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2006 (S.I. 2006/3236), regs. 1(1), 3(4)

F68 Reg. 6(5B)(5C) inserted (27.12.2006 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2006 (S.I. 2006/3236), regs. 1(1), 3(5)

F69 Words in reg. 6(6) inserted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 7(2)(a)

F70 Words in reg. 6(6) substituted (29.12.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2005 (S.I. 2005/3374), regs. 1(1), 7(5)

F71 Reg. 6(6A) inserted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 7(3)

F72 Words in reg. 6(6A) substituted (27.12.2006 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2006 (S.I. 2006/3236), regs. 1(1), 3(6)

F73 Words in reg. 6(6A) added (29.12.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2005 (S.I. 2005/3374), regs. 1(1), 7(6)

F74 Word in reg. 6(7) substituted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 7(4)

F75 Words in reg. 6(7) substituted (27.12.2006 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2006 (S.I. 2006/3236), regs. 1(1), 3(6)

F76 Words in reg. 6(7) inserted (29.12.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2005 (S.I. 2005/3374), regs. 1(1), 7(7)

F77 Reg. 6(7A)(7B) inserted (27.12.2006 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2006 (S.I. 2006/3236), regs. 1(1), 3(7)

F78 Words in reg. 6(8) revoked (29.12.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2005 (S.I. 2005/3374), regs. 1(1), 7(8)

F79 Words in reg. 6(9) revoked (29.12.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2005 (S.I. 2005/3374), regs. 1(1), 7(8)

F80 Word in reg. 6(9) omitted (27.12.2006 with effect in accordance with reg. 1(2) of the amending S.I.) by virtue of The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2006 (S.I. 2006/3236), regs. 1(1), 3(8)

F81 Words in reg. 6(9) substituted (29.12.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2005 (S.I. 2005/3374), regs. 1(1), 7(9)

F82 Reg. 6(9A) inserted (29.12.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2005 (S.I. 2005/3374), regs. 1(1), 7(10)

F83 Words in reg. 6(9A) inserted (27.12.2006 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2006 (S.I. 2006/3236), regs. 1(1), 3(9)

F84 Words in reg. 6(10)(a) substituted (27.12.2006 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2006 (S.I. 2006/3236), regs. 1(1), 3(10)(a)

F85 Words in reg. 6(10)(c) substituted (27.12.2006 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2006 (S.I. 2006/3236), regs. 1(1), 3(10)(a)

F86 Words in reg. 6(12)(a) inserted (29.12.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2005 (S.I. 2005/3374), regs. 1(1), 7(11)

F87 Words in reg. 6(12)(b) substituted (27.12.2006 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2006 (S.I. 2006/3236), regs. 1(1), 3(10)(b)

F88 Reg. 6(12A) inserted (29.12.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2005 (S.I. 2005/3374), regs. 1(1), 7(12)

F89 Words in reg. 6(13) substituted (27.12.2006 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2006 (S.I. 2006/3236), regs. 1(1), 3(10)(c)

Commencement Information

I6 Reg. 6 in force at 1.1.2005, see reg. 1(1)

Fair value profits or losses arising from derivative contracts which are currency contracts U.K.

7.— [F90 (1) For the purposes of paragraph 17C(1)(a) of Schedule 26 to the Finance Act 2002 there is prescribed in relation to a derivative contract whose underlying subject matter consists wholly of currency —

(a) all credits and debits representing the whole or part of a company’s fair value profit or loss in an accounting period if—

(i) there is a hedging relationship between the contract or part of the contract and a forecast transaction or a firm commitment (“the hedged item”) of the company; and

(ii) the hedged item is not one [F91 for which fair value profits or losses are brought into account for the purposes of corporation tax];

(b) a company’s paragraph 50A credit or debit in relation to such a contract, if for the accounting period in which the paragraph 50A credit or debit falls to be brought into account sub-paragraph (a) applies to the contract; and

(c) a company’s prior period adjustment credit or debit in relation to such a contract, if for the accounting period in which the prior period adjustment credit or debit falls to be brought into account sub-paragraph (a) applies to the contract,

and the credits and debits mentioned in sub-paragraphs (a) to (c) together make up the regulation 7 fair value profits or losses.]

F92 (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(3) Where there is a hedging relationship between part of a currency contract and a hedged item, the part of the [F93 regulation 7] fair value profit or loss that is prescribed is the part which bears to the whole the proportion which the value of that part of the contract which is in the hedging relationship bears to the value of the whole of the contract.

[F94 (4) Paragraph 16(3) of Schedule 26 to the Finance Act 2002 does not apply to any regulation 7 fair value profit or loss.]

Textual Amendments

F90 Reg. 7(1) substituted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 8(2)

F91 Words in reg. 7(1)(a)(ii) substituted (29.12.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2005 (S.I. 2005/3374), regs. 1(1), 8

F92 Reg. 7(2) omitted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by virtue of The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 8(3)

F93 Words in reg. 7(3) inserted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 8(4)

F94 Reg. 7(4) inserted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 8(5)

Commencement Information

I7 Reg. 7 in force at 1.1.2005, see reg. 1(1)

[F95 Exchange gains or losses arising from derivative contracts hedging anticipated or future proceeds from certain issues of shares U.K.

7A.— (1) For the purposes of section 598(1)(a) of the Corporation Tax Act 2009, an exchange gain or loss arising to a company is an excluded amount in an accounting period in relation to a derivative contract if—

(a) the underlying subject matter of the contract consists wholly of currency; and

(b) there is a relevant hedging relationship within the meaning of paragraph (2).

(2) There is a relevant hedging relationship between a derivative contract (or part of a derivative contract) and the anticipated or future proceeds of an announced or proposed rights issue or open offer of shares (“relevant share issue”) if, and to the extent that—

(a) the contract (or part of the contract) is intended to hedge the economic risk to future capital raised under the relevant share issue (“the hedged item”); and

(b) the economic risk is attributable to fluctuations in exchange rates between the currency in which the relevant share issue is denominated and the company’s functional currency.

(3) If there is a hedging relationship between part of a currency contract and a hedged item, the part of the fair value profit or loss that is an excluded amount is the part which bears to the whole the proportion which the value of that part of the contract which is in the hedging relationship bears to the value of the whole contract

(4) Paragraph (1) shall not apply to a derivative contract which is entered into with a person (“person A”) to whom the company is connected unless—

(a) a person who is connected to the company enters into a derivative contract with a person who is not connected with the company; and

(b) that contract confers rights or imposes liabilities which are equivalent to those of A under the contract which A entered with the company.

(5) Section 466 of the Corporation Tax Act 2009 (companies connected for an accounting period) applies for the purposes of paragraph (4).

(6) A derivative contract to which this regulation applies may act as a hedge of the anticipated or future proceeds from a relevant share issue only to the extent that the value of the obligation under the derivative contract (within the meaning of regulation 4(5)) does not exceed the anticipated or future proceeds from the relevant share issue which, but for the derivative contract, would not be hedged.

(7) Subsections (3) and (4) of section 606 of the Corporation Tax Act 2009 do not apply to any exchange gain or loss which is an excluded amount by virtue of paragraph (1).

(8) In this regulation—

(a) “functional currency”, in relation to a company, means the currency of the primary economic environment in which the company operates; and

(b) “rights issue or open offer of shares” means an offer or invitation to existing shareholders to subscribe for or purchase further shares in proportion to (or as nearly as may be in proportion to) their current holdings.]

Textual Amendments

F95 Reg. 7A inserted (5.8.2009 with application and effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2009 (S.I. 2009/1886), regs. 1(1), 5 (with reg. 7)

Profits or losses arising from derivative contracts which are commodity contracts or debt contracts U.K.

8.— [F96 (1) For the purposes of paragraph 17C(1)(a) of Schedule 26 to the Finance Act 2002 there is prescribed in relation to a commodity contract or debt contract—

(a) all credits and debits representing the whole or part of a company’s fair value profit or loss arising in an accounting period if—

(i) there is a hedging relationship between the contract or part of the contract and a forecast transaction or a firm commitment (“the hedged item”) of the company; and

(ii) the hedged item is not one [F97 for which fair value profits or losses are brought into account for the purposes of corporation tax];

(b) a company’s paragraph 50A credit or debit, if for the accounting period in which the paragraph 50A credit or debit falls to be brought into account, sub-paragraph (a) applies to the contract; and

(c) a company’s prior period adjustment credit or debit, if for the accounting period in which the prior period adjustment credit or debit falls to be brought into account, sub-paragraph (a) applies to the contract,

and the credits and debits mentioned in sub-paragraphs (a) to (c) together make up the regulation 8 fair value profits or losses.]

(2) In this regulation—

“a commodity contract” means a derivative contract whose underlying subject matter is commodities unless the contract is an interest rate contract within the meaning of regulation 9(4); and

“a debt contract” means a derivative contract whose underlying subject matter is an asset or liability representing a loan relationship unless the contract is an interest rate contract within the meaning of regulation 9(4).

(3) Where there is a hedging relationship between part of a commodity contract or part of a debt contract as the case may be and a hedged item, the part of the [F98 regulation 8] fair value profit or loss that is prescribed is the part which bears to the whole the proportion which the value of that part of the contract which is in the hedging relationship bears to the value of the whole of the contract.

Textual Amendments

F96 Reg. 8(1) substituted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 9(2)

F97 Words in reg. 8(1)(a)(ii) substituted (29.12.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2005 (S.I. 2005/3374), regs. 1(1), 8

F98 Words in reg. 8(3) inserted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 9(3)

Commencement Information

I8 Reg. 8 in force at 1.1.2005, see reg. 1(1)

Profits or losses arising from derivative contracts which are interest rate contracts U.K.

9.—(1) For the purposes of paragraph 17C(1)(a) of Schedule 26 to the Finance Act 2002 there is prescribed all credits and debits representing the whole or part of the fair value profit or loss arising to a company in relation to its interest rate contracts in an accounting period if—

(a) there is a hedging relationship between the contract or a portion of the contract and any of the risks arising in respect of an asset, liability, receipt or expense (“the hedged item”); and

(b) fair value profits or losses arising on the hedged item or in relation to any of the risks [F99 , in relation to which the contract was intended to act as a hedge,] arising in respect of the hedged item, or any portion of the hedged item, are not brought into account for the purposes of corporation tax for that period.

(2) Where paragraph (1) applies, credits and debits shall be brought into account for the purposes of paragraph 17C(1)(b) of Schedule 26 to the Finance Act 2002 on the assumption that an appropriate accruals basis had been used in relation to the contract for that accounting period.

[F100 (2A) Where an interest rate contract—

(a) becomes a contract to which paragraph (1) applies, or

(b) ceases to be a contract to which paragraph (1) applies,

the amount to be brought into account for the purposes of paragraph 17C(1)(b) of Schedule 26 to the Finance Act 2002 is such amount as is just and reasonable in the circumstances and with regard to whether as a result of the change any amounts cease to be brought into account or are brought into account more than once.]

(3) Where paragraph 16(3) of Schedule 26 to the Finance Act 2002(13) or regulation 4 apply to a contract to which this regulation applies nothing in this regulation is to require any exchange gains or losses in relation to that contract to be brought into account.

(4) In this regulation—

“an appropriate accruals basis” in relation to a derivative contract is one where—

(a)

the contract is shown in the company’s accounts at cost (which may be nil), and the cost is adjusted for any cumulative amortisation of any premium or other amount falling to be recognised in arriving at the cost of the contract;

(b)

the aggregate of—

(i)

the amount of periodical payments under the contract, or in the case of a swap contract under which only a single payment is to be made, the value of the payment and

(ii)

the credits or debits representing interest arising, on the assumption that an effective interest method is used, in respect of the asset or liability representing a loan relationship which is the hedged item,

represent the credits or debits that would be given by generally accepted accounting practice in relation to an asset or liability representing a loan relationship whose terms include those of both the hedged item and the interest rate contract;

(c)

exchange gains and losses are recognised as a result of the translation of the contract at the balance-sheet date; and

(d)

profits and losses which arise as a result of the contract coming to an end before its stated date of maturity are amortised and brought into account over the unexpired term of the hedged item.

“an interest rate contract” means—

(i)

a derivative contract whose underlying subject matter is, or includes, interest rates, or

(ii)

if not falling within paragraph (i), a swap contract in which payments fall to be made by reference to a rate of interest or to an index determined by reference to income or retail prices.

(5) For the purposes of paragraph 17C(1)(a) of Schedule 26 to the Finance Act 2002, there is also prescribed for any period any credits and debits which—

(a) have for that or any previous period been brought into account in the statement of recognised gains and losses or statement of changes in equity (“equity statements”); and

(b) represent fair value profits or losses which are transferred in that period from an equity statement—

(i) to the profit and loss account or income statement, or

(ii) directly to the carrying value of an asset or liability.

(6) Where credits and debits are prescribed by sub-paragraph (5) there is also prescribed, for the purposes of paragraph 17C(1)(a) of Schedule 26 to the Finance Act 2002, any debits and credits corresponding to the sub-paragraph (5) credits and debits which are brought into account in the profit and loss account or income statement when—

(a) the hedged item is recognised; or

(b) a forecast transaction is no longer expected to occur.

(7) This regulation does not apply to any contract to which paragraphs 6,7 or 8 of Schedule 26 to the Finance Act 2002(14) applies.

Textual Amendments

F99 Words in reg. 9(1)(b) inserted (27.12.2006 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2006 (S.I. 2006/3236), regs. 1(1), 4

F100 Reg. 9(2A) inserted (29.12.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2005 (S.I. 2005/3374), regs. 1(1), 9

Commencement Information

I9 Reg. 9 in force at 1.1.2005, see reg. 1(1)

[F101 9A.— (1) For the purposes of paragraph 17C(1)(a) of Schedule 26 to the Finance Act 2002 there is prescribed all credits and debits representing the whole or part of the fair value profit or loss arising to a company in relation to [F102 a currency contract, a commodity contract, a debt contract or an interest rate contract (as the case may be)] in an accounting period if—

(a) the contract or a portion of the contract (“the hedging instrument”) is designated as a hedge in respect of any risks arising in respect of an asset, liability, receipt or expense (“the hedged item”);

(b) fair value profits or losses arising on the hedging instrument are recognised in accordance with generally accepted accounting practice in the company’s statement of recognised gains and losses or statement of changes in equity (“equity statements”); and

(c) the company has made an election under regulation [F103 6(3A), 6(5) or 6(5B) (as the case may be)].

This is subject to paragraph (2).

(2) Credits and debits which—

(a) are brought into account in the profit and loss account or income statement (including debits and credits previously brought into account in an equity statement and transferred to the profit and loss account or income statement), or

(b) are taken to the carrying value of an asset or liability [F104 where the profit or loss for corporation tax purposes in relation to that asset or liability will not fall to be computed in accordance with generally accepted accounting practice],

are not prescribed for the purposes of paragraph 17C(1)(a) of Schedule 26 to the Finance Act 2002.This is subject to paragraph (3).

(3) In relation to credits or debits within paragraph (2)(a) [F105 or (b)], there is prescribed for the purposes of paragraph 17C(1)(a) of Schedule 26 to the Finance Act 2002 any debits or credits corresponding to the paragraph (2)(a) [F105 or (b)] debits or credits which are reflected in an equity statement.

[F106 (3A) Where—

(a) amounts in respect of a currency contract, a commodity contract or a debt contract are brought into account differently as a result of an election under regulation 6(3A), or

(b) an interest rate contract ceases to be a contract to which regulation 9 applies as a result of an election under regulation 6(5B),

the amount to be brought into account for the purposes of paragraph 17C(1)(b) of Schedule 26 to the Finance Act 2002 is such amount as is just and reasonable in the circumstances and with regard to whether as a result of the change any amounts cease to be brought into account or are brought into account more than once, and that amount shall be brought into account on the first day of the first accounting period beginning on or after 1st January 2006.]

(4) In this regulation “an interest rate contract” has the same meaning as in regulation 9.]

Textual Amendments

F101 Reg. 9A inserted (29.12.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2005 (S.I. 2005/3374), regs. 1(1), 10

F102 Words in reg. 9A(1) substituted (27.12.2006 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2006 (S.I. 2006/3236), regs. 1(1), 5(2)(a)

F103 Words in reg. 9A(1)(c) substituted (27.12.2006 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2006 (S.I. 2006/3236), regs. 1(1), 5(2)(b)

F104 Words in reg. 9A(2)(b) inserted (27.12.2006 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2006 (S.I. 2006/3236), regs. 1(1), 5(3)

F105 Words in reg. 9A(3) inserted (27.12.2006 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2006 (S.I. 2006/3236), regs. 1(1), 5(4)

F106 Reg. 9A(3A) inserted (27.12.2006 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2006 (S.I. 2006/3236), regs. 1(1), 5(5)

Bringing fair value profits or losses into account on currency and commodity contracts U.K.

10.—(1) For the purposes of paragraph 17C(1)(c) of Schedule 26 to the Finance Act 2002—

(a) there is prescribed the aggregate of the credits and debits representing any [F107 regulation 7 or 8] fair value profits or losses excluded in relation to a derivative contract of a company F108 ...; and

(b) the amount of that aggregate is brought into account for the period in which a termination event occurs.

This is subject to paragraphs (3), (5), (7) and (8).

(2) In paragraph (1) a “termination event” occurs—

(a) on the company ceasing to be a party to the contract; or

(b) if earlier, when the hedged item begins to affect the company’s profit or loss.

(3) If the forecast transaction or firm commitment which is the hedged item mentioned in regulation 7 or regulation 8 is a forecast transaction of, or a firm commitment to a purchase of, anything the expenditure in relation to which—

(a) falls to be taken into account in computing the profits of a trade or property business carried on by the company, or

(b) would fall to be deducted but for any provision of the Corporation Tax Acts prohibiting the deduction of capital expenditure in respect of depreciation of an asset,

then the aggregate mentioned in paragraph (1)(a) in relation to the contract is[F109 , subject to paragraph (3A),] to be brought into account in the accounting period in which the expenditure falls or would fall to be deducted.

[F110 (3A) [F111 Subject to paragraph (3B),] if paragraph (3)(b) applies—

(a) the amount to be brought into account in an accounting period is the product of

where—

• DA is the amount of depreciation recognised in the profit and loss account or income statement in relation to the hedged item in the accounting period,

• E is the total expenditure on the hedged item, and

• FVP is the aggregate amount of regulation 7 or 8 fair value profit;

(b) where the hedged item is disposed of, the balance of the aggregate amount mentioned in paragraph (1)(a) which has not been brought into account under sub-paragraph (a) of this paragraph shall be brought into account in the accounting period in which the disposal takes place.]

[F112 (3B) Where the disposal mentioned in paragraph (3A)(b) is to a company (“the transferee”) which is a member of the same group of companies, in applying paragraph (3A)(a) to the transferee FVP shall be treated as meaning the fair value profits and losses of the transferor.

(3C) In paragraph (3B), “group of companies” has the meaning given in paragraph 28(6) of Schedule 26 to the Finance Act 2002.]

(4) In paragraph (3) “property business” has the meaning given in paragraph 32(2) of Schedule 29 to the Finance Act 2002(15) (gains and losses of a company from intangible fixed assets).

(5) Where—

(a) part of a contract to which this regulation applies terminates without the company ceasing to be a party to the contract, or

(b) part only of the hedged item begins to be recognised in determining the company’s profit and loss,

paragraph (1)(b) [F113 or paragraph (3)] is to apply to a proportionate amount of the aggregate.

(6) In paragraph (5) “proportionate amount” means that proportion of the relevant aggregate amount which is—

(a) in a case where it is part of the contract which matures, the [F114 proportion] which the fair value of the part of the contract maturing bears to the fair value of the whole of the contract at that time, and

(b) in any other case the proportion which the fair value of the hedged item [F115 which begins] to be recognised bears to the fair value of the whole of the hedged item at that time.

(7) Where immediately on ceasing to be a party to the contract (“the old contract”), the company enters into another contract (“the new contract”) which meets the conditions in regulation 7 or regulation 8 in relation to the same hedged item as was the hedged item in relation to the old contract—

(a) paragraph (1)(b) shall not apply in relation to the old contract, and

(b) the aggregate prescribed in paragraph (1)(a) in relation to the old contract shall be treated for the purposes of the application of this regulation to the new contract as included in the aggregate prescribed in relation to the new contract.

(8) Where as a result of the company (“the transferor company”) ceasing to be a party to the contract (“the old contract”)—

(a) paragraph 28 of Schedule 26 to the Finance Act 2002 [F116 would apply but for paragraph 30 of that Schedule], and

(b) the transferee company (within the meaning of paragraph 28 of that Schedule) meets the conditions in regulation 7 or regulation 8 in relation to the contract (“the new contract”) and the same hedged item as was the hedged item in relation to the old contract,

paragraph (9) applies.

(9) Where this paragraph applies—

(a) paragraph (1)(b) shall not apply in relation to the old contract; and

(b) the aggregate prescribed in paragraph (1)(a) in relation to the old contract shall be treated for the purposes of the application of this regulation to the new contract as included in the aggregate prescribed in relation to the new contract.

(10) For the purposes of paragraph 17C(1)(a) of Schedule 26 to the Finance Act 2002, there is also prescribed for any period any credits and debits which—

(a) have for that or any previous period been brought into account in the statement of recognised gains and losses or statement of changes in equity (“equity statements”); [F117 and]

(b) represent [F118 regulation 7 or 8] fair value profits or losses which are transferred in that period from an equity statement—

(i) to the profit and loss account or income statement, or

(ii) directly to the carrying value of an asset or liability.

(11) Where credits and debits are prescribed by sub-paragraph (10) there is also prescribed, for the purposes of paragraph 17C(1)(a) of Schedule 26 to the Finance Act 2002, any debits and credits corresponding to the sub-paragraph (10) credits and debits which are brought into account in the profit and loss account or income statement when—

(a) the hedged item is recognised; or

(b) a forecast transaction is no longer expected to occur.

Textual Amendments

F107 Words in reg. 10(1)(a) inserted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 10(2)(a)

F108 Words in reg. 10(1)(a) omitted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by virtue of The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 10(2)(b)

F109 Words in reg. 10(3) inserted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 10(3)

F110 Reg. 10(3A) inserted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 10(4)

F111 Words in reg. 10(3A) inserted (29.12.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2005 (S.I. 2005/3374), regs. 1(1), 11(2)

F112 Reg. 10(3B)(3C) inserted (29.12.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2005 (S.I. 2005/3374), regs. 1(1), 11(3)

F113 Words in reg. 10(5) inserted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 10(5)

F114 Word in reg. 10(6)(a) substituted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 10(6)(a)

F115 Words in reg. 10(6)(b) substituted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 10(6)(b)

F116 Words in reg. 10(8)(a) substituted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 10(7)

F117 Word in reg. 10(10)(a) substituted (29.12.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2005 (S.I. 2005/3374), regs. 1(1), 11(4)

F118 Words in reg. 10(10)(b) inserted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 10(8)

Commencement Information

I10 Reg. 10 in force at 1.1.2005, see reg. 1(1)

[F119 Bringing exchange gains into account on contracts to which regulation 7A applies U.K.

10A.— (1) For the purposes of section 598(1)(c) of the Corporation Tax Act 2009 there is an amount to be brought into account which is equivalent to the amount of any exchange gain specified in paragraph (2).

(2) The exchange gain specified is any exchange gain—

(a) arising to a company in relation to a derivative contract to which regulation 7A applies or applied, and

(b) which has been distributed to the shareholders of the company.

(3) The amount to be brought into account by paragraph (1) is to be brought into account for the accounting period in which the distribution is made.]

Textual Amendments

F119 Reg. 10A inserted (5.8.2009 with application and effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2009 (S.I. 2009/1886), regs. 1(1), 6

[F120 Profits and losses arising from loan relationships with embedded derivatives U.K.

11.— [F121 (1) For the purposes of section 85B(3) of the Finance Act 1996 (amounts recognised in determining company’s profits and loss) the amounts described in paragraph (2) are prescribed in relation to a company which is party to a creditor relationship to which—

(a) either—

(i) section 92 (convertible securities etc: creditor relationships), or

(ii) section 93 (relationships linked to the value of chargeable assets),

of the Finance Act 1996 applied immediately before the start of the first accounting period of the company to begin on or after 1st January 2005, and

(b) section 94A of the Finance Act 1996 (loan relationships with embedded derivatives) applies in the first accounting period of the company to begin on or after 1st January 2005.

(1A) Where paragraph (1) does not apply, for the purposes of section 85B(3) of the Finance Act 1996 the amounts described in paragraph (3) are prescribed in relation to a company which is party to a creditor relationship to which—

(a) section 92, or

(b) section 93,

of the Finance Act 1996 applies immediately before the start of the first accounting period of the company to begin on or after 1st January 2005.]

(2) The prescribed amounts are all credits and debits in respect of the host contract save for—

(a) credits in relation to interest accruing in respect of the creditor relationship without regard to the amounts given by the effective interest method; and

(b) [F122 where paragraph (1)(a)(i) applies,] credits and debits in respect of exchange gains and losses.

(3) The prescribed amounts are all credits and debits save for—

(a) credits in relation to interest, and

(b) [F123 where paragraph (1A)(a) applies,] credits and debits in respect of exchange gains and losses.

[F124 (4) Where there is a change of accounting policy in drawing up a company’s accounts from one period of account to the next affecting the amounts to be brought into account for accounting purposes in respect of the company’s loan relationships, the amounts prescribed in paragraphs (1) to (3) that would otherwise be brought into account for the purposes of Chapter 2 of the Finance Act 1996 shall not be brought into account.]]

Textual Amendments

F120 Regs. 11, 12 inserted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 11

F121 Reg. 11(1)(1A) substituted for reg. 11(1) (27.12.2006 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2006 (S.I. 2006/3236), regs. 1(1), 6(2)

F122 Words in reg. 11(2)(b) inserted (27.12.2006 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2006 (S.I. 2006/3236), regs. 1(1), 6(3)

F123 Words in reg. 11(3)(b) inserted (27.12.2006 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2006 (S.I. 2006/3236), regs. 1(1), 6(4)

F124 Reg. 11(4) inserted (29.11.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2005 (S.I. 2005/3374), regs. 1(1), 12

[F120 12.— [F125 (1) For the purposes of section 85B(3) of the Finance Act 1996 the amounts described in paragraph (2) are prescribed in relation to a company which is party to a debtor relationship to which—

(a) either—

(i) section 92A (convertible securities etc: debtor relationships), or

(ii) section 93,

of the Finance Act 1996 applies immediately before the start of the first accounting period of the company to begin on or after 1st January 2005, and

(b) section 94A of the Finance Act 1996 applies in the first accounting period of the company to begin on or after 1st January 2005.

This is subject to paragraph (4).

(1A) Where paragraph (1) does not apply, for the purposes of section 85B(3) of the Finance Act 1996 the amounts described in paragraph (2A) are prescribed in relation to a company which is party to a debtor relationship to which—

(a) section 92A, or

(b) section 93,

of the Finance Act 1996 applies immediately before the start of the first accounting period of the company to begin on or after 1st January 2005.

This is subject to paragraph (4).

(2) The prescribed amounts are—

(a) where paragraph (1)(a)(i) applies, debits to the extent that they are within section 92A(3) of the Finance Act 1996;

(b) where paragraph (1)(a)(ii) applies, all debits and credits in respect of the host contract save for debits in relation to interest accruing in respect of the debtor relationship without regard to the amounts given by the effective interest method.

(2A) The prescribed amounts are—

(a) where paragraph (1A)(a) applies, debits to the extent that they are within section 92A(3) of the Finance Act 1996;

(b) where paragraph (1A)(b) applies, all debits and credits in respect of the host contract save for debits in relation to interest.]

[F126 (3) Where there is a change of accounting policy in drawing up a company’s accounts from one period of account to the next affecting the amounts to be brought into account for accounting purposes in respect of the company’s loan relationships, the amounts prescribed in paragraphs (1) and (2) that would otherwise be brought into account for the purposes of Chapter 2 of the Finance Act 1996 shall not be brought into account.

(4) This regulation does not apply to a company which is a party to a debtor relationship in a case where—

(a) the company is carrying on a banking business or a business consisting wholly or partly in dealing in securities, and

(b) it entered into the debtor relationship in the ordinary course of that business.]]

Textual Amendments

F120 Regs. 11, 12 inserted (11.8.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 11

F125 Reg. 12(1)-(2A) substituted for reg. 12(1)(2) (27.12.2006 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2006 (S.I. 2006/3236), regs. 1(1), 7(2)

F126 Reg. 12(3)(4) inserted (29.12.2005 with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2005 (S.I. 2005/3374), regs. 1(1), 13(4)

[F127 Transitional provision: exchange losses arising from contracts to which regulation 7A applies U.K.

13.— (1) This regulation applies to a derivative contract to which regulation 7A applies—

(a) which was entered into on or after 1st January 2009;

(b) which formed part of a relevant hedging relationship (within the meaning of regulation 7A) up to and including 10th March 2009; and

(c) in respect of which an exchange loss would have arisen to the company had an accounting period ended on 9th March 2009.

(2) For the purposes of section 598(1)(c) of the Corporation Tax Act 2009 the amount to be brought into account is the lower of—

(a) the exchange loss arising to the company which is incurred on the termination of the derivative contract; or

(b) the exchange loss which would have arisen to the company in relation to the derivative contract had an accounting period ended on 9th March 2009.

(3) Paragraph (4) applies if there is more than one derivative contract to which regulation 7A applies in relation to the same hedged item.

(4) The total amount of the exchange loss in relation to those contracts which is to be brought into account under this regulation shall not exceed the aggregate net exchange losses (if any) which—

(a) arose to the company on the termination of those contracts, or

(b) would have arisen to the company in relation to those contracts had an accounting period ended on 9 March 2009.

(5) Where paragraph (4) applies, the amount of loss to be brought into account is to be apportioned between each of the contracts on a just and reasonable basis.

(6) For the purposes of this regulation, the termination of a derivative contract shall be regarded as having occurred on the earlier of—

(a) the day on which the contract is terminated, or

(b) the last day of the first accounting period which ends on or after 10th March 2009.

(7) The amount to be brought into account for the purposes of section 598(1)(c) of the Corporation Tax Act 2009 is nil in a case where—

(a) no exchange loss arises to the company on the termination of the derivative contract;

(b) there is more than one derivative contract to which regulation 7A applies in relation to the same hedged item and no aggregate net exchange loss arises to the company on the termination of those contracts; or

(c) there is more than one derivative contract to which regulation 7A applies in relation to the same hedged item and no aggregate net exchange loss would have arisen to the company in relation to those contracts had an accounting period ended on 9th March 2009.]

Textual Amendments

F127 Reg. 13 inserted (5.8.2009 with application and effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2009 (S.I. 2009/1886), regs. 1(1), 7

Derek Twigg

Nick Ainger

Two of the Lords Commissioners of Her Majesty’s Treasury

9th December 2004

Explanatory Note

(This note is not part of the Regulations)

These Regulations allow certain profits and losses from loan relationships and derivative contracts to be left out of account, to be brought into account in a different way or to be brought into account at a later date.

Regulation 1 provides for the citation, commencement and effect.

Regulation 2 provides for the interpretation.

Regulation 3 prescribes for exchange gains or losses arising from liabilities hedging shares etc. to be disregarded where the contract is matched with shares, ships or aircraft.

Regulation 4 prescribes for exchange gains or losses arising from derivative contracts hedging shares etc. to be disregarded where the contract is matched with shares, ships or aircraft.

Regulation 5 contains provisions supplementary to regulations 3 and 4.

Regulation 6 introduces, in relation to fair value profits and losses, specific rules which are contained in regulations 7, 8 and 9 and in particular provides for the rules in those regulations to be subject to elections.

Regulation 7 prescribes fair value profits and losses arising from derivative contracts which are currency contracts.

Regulation 8 prescribes bringing fair value profits and losses into account on commodity contracts and debt contracts.

Regulation 9 prescribes profits or losses arising from derivative contracts which are interest rate contracts.

Regulation 10 brings into account profits or losses arising on currency and commodity contracts.

These Regulations do not impose any new costs on business.

(1)

1996 c. 8. Section 84A was inserted by paragraph 3 of Part 1 of Schedule 23 to the Finance Act 2002 (c. 23) and sub-section (3A) was substituted by paragraph 2(2) of Schedule 10 to the Finance Act 2004 (c. 12) (“the 2004 Act”). Sections 85B was substituted and inserted by paragraph 3 of Schedule 10 to the 2004 Act.

(2)

2002 c. 23. Paragraph 16(3A) was substituted by paragraph 48(2), and paragraphs 17C(1) and 17C(3)(b) were substituted by paragraph 50, of Part 2 of Schedule 10 to the 2004 Act.

(3)

Section 103 was inserted by paragraph 17(2)(b) of Part 1 of Schedule 10 to the 2004 Act.

(4)

2004 c. 12.

(5)

2001 c. 2.

(6)

1992 c. 12. Part 1 was inserted by paragraph 1 of Part 1 of Schedule 8 to the Finance Act 2002.

(7)

1988 c. 1. Schedule 28AA was inserted by Schedule 16 to the Finance Act 1998 (c. 36). Paragraph 6D was inserted by section 35(2) of the 2004 Act.

(8)

Paragraph 28 was amended by section 179(1), (2), (3) and (5) of the Finance Act 2003 (c. 14) and section 30 of and paragraph 15(2) of Schedule 5 to the 2004 Act.

(9)

Paragraph 30 was amended by section 179(4) and (5) of the Finance Act 2003 and section 52 of and paragraph 57of Schedule 10 to the 2004 Act.

(10)

1992 c. 12.

(11)

2000 c. 8.

(12)

Section 349(5) and (6) were added by section 95 of the Finance Act 2002.

(13)

2002 c. 23. Sub-paragraph (3) was substituted by subsequent sub-paragraphs (3) and (3A) by paragraph 48(2) of Part 2 of Schedule 10 to the 2004 Act.

(14)

Paragraphs 6, 7 and 8 of Schedule 26 were amended by articles 1 and, respectively, 8, 9 and 10 of S.I. 2004/2201.

(15)

2002 c. 23.