Chapter 3: The credits and debits to be brought into account: general
1054.This Chapter provides the rules for bringing profits and deficits on loan relationships into account for corporation tax purposes. The provisions in this Chapter all represent rules that apply generally rather than to specific types of securities or specific types of companies. They have therefore been placed early on in the Part.
Section 306: Overview of Chapter
1055.This section provides an overview of the Chapter, explains the purpose of the sections within the Part and signposts other relevant Chapters. It is new.
Section 307: General principles about the bringing into account of credits and debits
1056.This section provides the rule that credits and debits are those recognised in determining the company’s profit and loss for a period and must fairly represent profits and losses from loan relationships and also gives further rules on allowable expenses. It is based on section 84(1) and (3) and 85A(1) of FA 1996.
1057.Subsections (3)(c) and (4) allow certain expenses on loans to be treated as debits for the purposes of this Part.
1058.The inclusion of profits of a capital nature in section 84(1)(a) of FA 1996 is rewritten in section 293(3).
Section 308: Amounts recognised in determining a company’s profit or loss
1059.This section explains what is meant by amounts recognised in determining a company’s profit or loss account for a period. It is based on section 85B(1) and (2) of FA 1996.
1060.This section updates the references in section 85B(1)(a) and (b) of FA 1996 to a company’s statement of income and gains, etc in line with current accountancy practice.
1061.Accounting terms appearing more than once are included in section 476 (other definitions). “Profit and loss account” (subsection (1)(a)) and “prior period adjustment” (subsection (2)) appear here only and take their ordinary accountancy meaning.
1062.Subsection (1)(b) rewrites “statement of recognised gains and losses” as “statement of total recognised gains and losses” as being the usual accountancy term.
1063.“Generally accepted accounting principles” appears in the Schedule 4 to this Act.
1064.Part 2(6) of Schedule 11 to F(No 2)A 2005 repeals section 85B(6) of FA 1996 with effect from a date to be appointed.
Section 309: Companies without GAAP-compliant accounts
1065.This section gives the rule to be applied where accounts have not been prepared in accordance with generally accepted accounting practice. It is based on section 85A(2) to (4) of FA 1996 and paragraph 14(8) of Schedule 13 to FA 2007.
1066.“Correct accounts” in section 85A(2) has been rewritten as “GAAP-compliant accounts” in subsection (1) as being a more neutral term.
Section 310: Power to make regulations about recognised amounts
1067.This section gives powers to make regulations affecting section 308. It is based on section 85B(3) to (6) of FA 1996 and paragraph 52 of Schedule 4 to FA 2005.
1068.Part 2(6) of Schedule 11 to F(No 2)A 2005 repeals section 85(6) of FA 1996 with effect from a day to be appointed. Subsection (5), which rewrites section 85B(6) of FA 1996, will therefore cease to have effect from an appointed day (see Part 8 (loan relationships) of Schedule 2 to this Act).
Section 311: Amounts not fully recognised for accounting purposes: introduction
1069.This section sets out the circumstances in which section 312 applies. It is based on section 85C(1) and (2) of FA 1996. This and the following section apply where, as a result of GAAP (generally accepted accounting practice), the full amount arising on transactions is not brought into account. This can arise in two circumstances: first where assets and liabilities are “matched” and GAAP permits the whole or part of the income arising on those assets to be “derecognised” and second where there is a capital contribution and the company is not treated as a party to a debtor relationship or as having a recognised accounting liability.
Section 312: Determination of credits and debits where amounts not fully recognised
1070.This section gives the rule to be applied where the circumstances in the preceding section are in point and requires credits and debits arising on transactions which are not recognised in determining the company’s profit or loss to be recognised. It is based on section 85C(3) to (8) of FA 1996.
Section 313: Basis of accounting: “amortised cost basis”, “fair value accounting” and “fair value”
1071.This section deals with the accounting bases that may apply to loan relationships. It is based on section 85A(1) and section 103(1) of FA 1996.
1072.In general a company may make use of either an amortised cost basis or fair value in accounting for loan relationships (both these terms are defined in the section) but certain provisions specify that an amortised cost basis or fair value basis must be used. These are listed in subsection (2).
Section 314: Power to make regulations about changes from amortised cost basis
1073.This section provides the powers for the Treasury to make regulations providing for the continued use of an amortised costs basis. It is based on section 90A(1) and (2) of FA 1996.
Section 315: Introduction to sections 316 to 319
1074.This section acts as an introduction to the following four sections which provide the rules to apply where there is a change in accounting policy from one period of account to the next. It is based on paragraph 19A(1) and (2) of Schedule 9 to FA 1996.
1075.Although this provision was enacted specifically to deal with companies changing from UK GAAP to international accounting standards or vice versa it will apply equally to other changes where both policies accord with the law and practice.
Section 316: Change of accounting policy involving change of value
1076.This section requires debits or credits to be brought into account representing the difference between the value of the asset or liability at the end of the last period of account under the old accounting policy and the beginning of the first period under the new accounting policy. It is based on paragraph 19A(3) and (5) of Schedule 9 to FA 1996.
Section 317: Carrying value
1077.This section gives the meaning of terms used in the previous section. It is based on paragraph 19A(4), (4A) and (4B) of Schedule 9 to FA 1996.
Section 318: Change of accounting policy following cessation of loan relationship
1078.This section provides for debits and credits representing differences in the value of assets and liabilities following a change of accounting policy to be brought into account where section 331 (company ceasing to be party to a loan relationship) also applies. It is based on paragraph 19A(4C) to (5) of Schedule 9 to FA 1996.
1079.Sub-paragraph (4C) of paragraph 19A provides for the difference between the two values to be brought into account at the beginning of the later period. This is not rewritten as it is unnecessary. This brings the section into line with paragraph 50A(3C) of Schedule 26 to FA 2002, the equivalent provision for derivative contracts.
Section 319: General power to make regulations about changes in accounting policy
1080.This section gives the Treasury powers to make regulations providing for debits and credits to be brought into account or not to be brought into account under this Part where a change of accounting policy affects the amounts brought into account for accounting purposes. The section is based on paragraph 19B of Schedule 9 to FA 1996 and paragraph 52 of Schedule 4 to FA 2005.
Section 320: Credits and debits treated as relating to capital expenditure
1081.This is the first of several sections which require debits and credits to be brought into, or not brought into, account for the purposes of this Part where normal accounting treatment is not followed. It is based on paragraph 14 of Schedule 9 to FA 1996. This section provides that a credit or debit which has been capitalised but which is in respect of a loan relationship is, in certain circumstances, to be brought into account.
1082.The words “for the purposes of corporation tax” in paragraph 14(2) have been rewritten in subsection (2) more narrowly as “for the purposes of this Part”, the wider purpose being unnecessary in this context.
1083.In subsection (6) “the interest component of the asset” is the interest element capitalised with the relevant asset.
Section 321: Credits and debits recognised in equity
1084.This section provides that credits and debits on loan relationships taken directly to reserves should be brought into account as if they were taken to the profit and loss account. It is based on paragraph 14A of Schedule 9 to FA 1996.
Section 322: Release of debts: cases where credits not required to be brought into account
1085.This section provides that credits are not brought into account by a debtor company on the release of the debt when an amortised cost basis is used and certain conditions are met. It is based on paragraph 5(3), (4), (7) and (8) of Schedule 9 to FA 1996.
1086.Conditions 2 and 3 of paragraph 5 of Schedule 9 to FA 1996 apply only where the debtor and creditor companies are connected and are rewritten in sections 358 and 359 in Chapter 6 of this Part (connected companies relationships: impairment losses and releases of debts).
1087.Subsection (6) lists the insolvency conditions from paragraph 6A(1) of Schedule 9 to FA 1996 rather than cross-referring as does paragraph 5(7).
Section 323: Meaning of expressions relating to insolvency etc
1088.This section gives the meaning of various terms relevant to the preceding section. It is based on paragraphs 5(7) and 6A(3) to (5) of Schedule 9 to FA 1996.
1089.References to Northern Ireland legislation in this section have been updated to take into account amendments made by the Insolvency (Northern Ireland) Order 2005 (SI 2005/1455 (NI10)).
Section 324: Restriction on debits resulting from revaluation
1090.This section precludes debits from being brought into account on revaluation of assets representing creditor relationships for the purposes of this Part (other than impairment losses or debt releases on the revaluation of asset) unless under fair value accounting. It is based on paragraph 6D(1) and (3) to (5) of Schedule 9 to FA 1996.
Section 325: Restriction on credits resulting from reversal of disallowed debits
1091.This section provides that the reversal of debits disallowed under the previous section are not brought into account under this Part. It is based on paragraph 6D(2) and (5) of Schedule 9 to FA 1996.
Section 326: Writing off government investments
1092.This section provides that no credit need be brought into account where the government releases a liability on a government debt. It is based on paragraph 7 of Schedule 9 to FA 1996.
Section 327: Disallowance of imported losses etc
1093.This section ensures that no part of a loss on a loan relationship is brought into account if it arose at a time when the loan relationship was not subject to United Kingdom taxation. It is based on paragraph 10 of FA 1996.
Section 328: Exchange gains and losses
1094.This section includes exchange gains and losses within credits and debits on loan relationships. It is based on section 84A(1) to (3A) and (8) to (10) of FA 1996.
1095.This section updates the references in section 84A(3)(b) of FA 1996 in line with current accountancy practice.
1096.Subsection (3)(b) rewrites “statement of recognised gains and losses” as “statement of total recognised gains and losses” as being the usual accountancy term.
1097.Section 84A(8) of FA 1996 as it applies to chargeable gains (section 84A(9)(b)) is rewritten as an insertion into TCGA. See Schedule 1 to this Act.
1098.Part 2(6) of Schedule 11 to F(No 2)A 2005 repeals section 84A of FA 1996 with effect from a day to be appointed. This section, which rewrites that section, therefore ceases to have effect from an appointed day (see Schedule 2 to this Act).
1099.Section 84A(8) and (9)(b) of FA 1996 allows the Treasury to make regulations for the purposes of TCGA. This provision is rewritten in new section 151E of TCGA.
Section 329: Pre-loan relationship and abortive expenses
1100.This section allows abortive expenditure in connection with a loan relationship. It is based on section 84(4) of FA 1996.
Section 330: Debits in respect of pre-trading expenditure
1101.This section provides for an election to be made for non-trading debits incurred before the commencement of a trade to be treated as trading debits after that trade has commenced. It is based on section 401(1AB) and (1AC) of ICTA.
Section 331: Company ceasing to be party to loan relationship
1102.This section provides for debits and credits to be taken into account in respect of a loan relationship to which a company is no longer a party if those debits and credits have not already been fully taken into account. It is based on section 103(6) to (8) of FA 1996.
Section 332: Repo, stock lending and other transactions
1103.This section provides that where a company ceases to be party to a loan relationship in any period (whether as a result of a repo or otherwise) but continues in accordance with GAAP to recognise amounts in its accounts in respect of that relationship the company must bring those amounts into account. It is based on paragraph 15 of Schedule 9 to FA 1996.
Section 333: Company ceasing to be UK resident
1104.This section provides that a company ceasing to be resident in the United Kingdom is treated as disposing of assets and liabilities which represent loan relationships at fair value unless they are held or owed by a permanent establishment in the United Kingdom. It is based on paragraph 10A(1) to (3) of Schedule 9 to FA 1996.
Section 334: Non-UK resident company ceasing to hold loan relationship for UK permanent establishment
1105.This section provides for a deemed disposal for fair value where an asset or liability representing a loan relationship of a non-UK resident company ceases to be held or owed by a permanent establishment in the United Kingdom other than as a result of a disposal etc. It is based on paragraph 10A(1), (1A) and (4) of Schedule 9 to FA 1996.