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

Rules about fair value profits and lossesU.K.

This section has no associated Explanatory Memorandum

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

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

(3) A company may elect that—

(a)regulation 7 shall not apply to its currency contracts which satisfy the conditions contained in regulation [F17(1)]; and

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

[F2(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) [F3or (3A)] shall apply to—

(a)all of the currency contracts entered into by the company which satisfy the conditions contained in regulation [F47(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) [F5Subject 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 [F6but 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).

[F7(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 [F8, 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.]

[F9(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 [F10(6A) and] (7), an election under paragraph (3) or (5) shall be made [F11before—

(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.]

[F12(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 [F13(3), (3A), (5) or (5A)] shall be made before the start of the subsequent period.]

[F14This 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 [F15under] paragraph [F16(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 [F17or, if later, 31st March 2006].

[F18(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) F19... 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) F20... shall be made, and may be revoked by the company which made it, by notice in writing to F21... [F22Her Majesty’s Revenue and Customs].

[F23(9A) An election under paragraph (5) shall be made in writing to Her Majesty’s Revenue and Customs and is irrevocable [F24except where revoked by an election made under paragraph (5B)].]

(10) If—

(a)a company (“the electing company”) makes an election under paragraph [F25(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 [F26(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(1) would apply but for paragraph 30(2) of that Schedule—

(a)paragraph 30 shall not apply (and accordingly paragraph 28 shall apply) [F27and 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 [F28(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.

[F29(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 [F30(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 [F30(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(3); and

“securities house” means a person—

(a)

who is authorised for the purposes of the Financial Services and Markets Act 2000(4); 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(5).

Textual Amendments

Commencement Information

I1Reg. 6 in force at 1.1.2005, see reg. 1(1)

(1)

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.

(2)

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.

(5)

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