Finance Act 1994

156 Basis of accounting: general

(1) Where, for the purposes of a qualifying company’s accounts, profits and losses for an accounting period on a qualifying contract held by the company are computed on—

(a) a mark to market basis of accounting which satisfies the requirements of this section, or

(b) an accruals basis of accounting which satisfies those requirements,

profits and losses for the period on the contract shall be computed on that basis for the purposes of this Chapter.

(2) Where subsection (1) above does not apply in the case of a qualifying contract held by a qualifying company and an accounting period, profits and losses for the period on the contract shall be computed for the purposes of this Chapter on a mark to market or accruals basis of accounting which—

(a) satisfies the requirements of this section, and

(b) is specified in an agreement between the company and the inspector or, in default of such an agreement, in a notice served on the company by the inspector.

(3) A mark to market basis of accounting satisfies the requirements of this section as regards a qualifying contract if—

(a) computing the profits or losses on the contract on that basis is in accordance with normal accountancy practice;

(b) all relevant payments under the contract are allocated to the accounting periods in which they become due and payable; and

(c) the method of valuation adopted is such as to secure the contract is brought into account at a fair value.

(4) An accruals basis of accounting satisfies the requirements of this section as regards a qualifying contract if—

(a) computing the profits or losses on the contract on that basis is in accordance with normal accountancy practice;

(b) all relevant payments under the contract are allocated to the accounting periods to which they relate, without regard to the accounting periods in which they are made or received, or become due and payable; and

(c) where such payments relate to two or more such periods, they are apportioned between those periods on a just and reasonable basis.

(5) In determining whether, as regards a qualifying contract, a relevant payment is dealt with as mentioned in subsection (4) above—

(a) regard shall be had to the accounting period or periods to which any reciprocal payment or payments are allocated, and to the basis on which any such payment or payments are apportioned between two or more such periods, but

(b) no regard shall be had to the accounting period or periods to which any other payment or payments are allocated, or to the basis on which any such payment or payments are so apportioned.

(6) References in this section to a qualifying company’s accounts shall be construed as follows—

(a) in the case of a company formed and registered under the [1985 c. 6.] Companies Act 1985, as references to its accounts drawn up in accordance with the requirements of that Act;

(b) in the case of a company formed and registered under the [S.I. 1986/1032 (N.I.6).] Companies (Northern Ireland) Order 1986, as references to its accounts drawn up in accordance with the requirements of that Order;

(c) in any other case, as references to the accounts which it is required to keep under the law of its home State or, if it is not so required to keep accounts, such of its accounts as most closely correspond to the accounts mentioned in paragraph (a) above;

and for the purposes of paragraph (c) above the home State of a company is the country or territory under whose law the company is incorporated.

(7) In this section—

• “fair value”, in relation to a qualifying contract, means the amount which, if the qualifying company disposed of the contract to a knowledgeable and willing party dealing at arm’s length, it would be able to obtain or, as the case may be, would have to pay;

• “reciprocal payment”, in relation to a relevant payment, means another such payment which is the consideration or part of the consideration for that payment;

• “relevant payment” means a qualifying payment made or received, or falling to be made or received, by the company.

(8) In the above definition of “reciprocal payment”, the second reference to a relevant payment includes a reference to any payment which—

(a) is subject to a condition precedent, and

(b) would be a relevant payment if the condition were fulfilled.