Chapter 13: General and supplementary provisions
Section 701: Power to amend some provisions
1943.This section contains powers for the amendment of this Part (and related paragraphs in Part 10 of Schedule 2). It is based on paragraph 13 of Schedule 26 to FA 2002 and paragraph 52 of Schedule 4 to FA 2005.
1944.The permitted amendments are broadly concerned with redefining what is or is not a derivative contract (whether by reference to the underlying subject matter of a relevant contract or otherwise). They are also concerned with adjusting the regime for special cases.
1945.Subsections (1) and (2) define what provisions in this Part and Schedule 2 may be amended by an order under this section. The lists in these subsections reflect the fact that the rules in the amendable provisions of the source legislation (Parts 2 and 9 of Schedule 26 to FA 2002) are now ordered differently in this Part.
1946.Subsection (5) contains the commencement provisions for an order made under this section. The normal rule is that an order applies to accounting periods ending on or after the date on which the order comes into force. That rule includes a degree of retrospection in that the order may apply by reference to events that occurred in that accounting period before the order came into force. Retrospective application is partly increased by paragraph (b) of this subsection, which allows the order to apply to periods of account beginning in the year in which they are made (which would cover, for example, an accounting period of less than 12 months which has ended before the order is made).
Section 702: “Carrying value”
1947.This section defines the meaning of “carrying value” for the purposes of this Part. It is based on paragraphs 28(6) and 50A(3A) and (3B) of Schedule 26 to FA 2002.
1948.Subsections (2) and (3) ensure that the effect of various provisions dealing with special cases carries through for the purposes of calculating the carrying value under this section.
1949.Subsection (4) provides a definition of “impairment loss” (a term taken from international accounting standards) which is only implied by the source legislation by virtue of its reference to “amounts recognised for accounting purposes”. The definition is modelled on that provided for loan relationships by section 476. See Change 67 in Annex 1.
Section 703: “Chargeable asset”
1950.This section defines the meaning of “chargeable asset” for the purposes of this Part. It is based on paragraphs 4A(4), 4B(5), 37(6) and 43A(3) of Schedule 26 to FA 2002.
1951.The definition extends under subsection (2) to amounts that are treated under section 143 of TCGA as assets whose disposal falls within TCGA. Those assets are obligations under a futures contract, that is, the obligation to supply or to take delivery of a commodity or other item under the contract at an agreed price. If there has been such market movement in the price of the commodity that the obligation is heading to produce a profit, a disposal of the obligation (before the contract has run to delivery) would be a disposal of an asset for the purposes of TCGA.
Section 704: “Creditor relationship” and “debtor relationship”
1952.This section defines “creditor relationship” and “debtor relationship” for the purposes of this Part. It is based on paragraphs 30A(7) and 54(1) of Schedule 26 to FA 2002.
1953.These terms occur in this Part in connection with a loan relationship or a relevant contract within section 585(2). The section therefore defines the terms by reference to section 302 in Part 5. In short, a creditor relationship refers to a debt owned and a debtor relationship to a debt owed by the company.
Section 705: Expressions relating to exchange gains and losses
1954.This section provides for the interpretation of references in this Part to “exchange gains” or “exchange losses” in relation to a company. It is based on paragraph 54(2), (2A) and (3) of Schedule 26 to FA 2002.
1955.Subsection (2) provides that, in the event that the comparison of values described in subsection (1) gives neither a gain nor a loss, an exchange gain of nil arises. This rule applies in a case where it is necessary for there be an amount of an exchange gain or exchange loss for a provision to apply (say, section 694(6)).
1956.Subsection (3) provides powers for the Treasury to make regulations as to the calculation of exchange gains and losses and any other profits, gains or losses if the company uses fair value accounting. See The Loan Relationships and Derivative Contracts (Exchange Gains and Losses using Fair Value Accounting) Regulations 2005 (SI 2005/3422). As in the case of the powers in section 701, regulations made under these powers may apply to any period of account beginning in the year in which they are made.
1957.Subsection (5) sets out what a reference to an exchange gain or loss from a company’s derivative contracts means (for the purposes of, say, section 606(1)).
Section 706: “Excluded body”
1958.This section defines “excluded body” for the purposes of this Part. It is based on paragraphs 45C(3), 45D(2), 45G(1A), 45J(2) and 45K(2) of Schedule 26 to FA 2002.
1959.The bodies which are excluded bodies are all types of collective investment scheme.
1960.“Authorised unit trust” is defined in section 832(1) of ICTA by reference to section 468(6) of that Act, which in turn refers to a scheme in respect of which an order under section 243 of FISMA is in force in the relevant accounting period.
1961.“Investment trust” has the meaning given by section 842 of ICTA and “venture capital trust” the meaning given by section 834(1) of ICTA (by reference to Part 6 of ITA).
1962.“Open-ended investment company” is defined in section 710 by reference to section 468A(2) of ICTA which in turn refers to a company incorporated in the United Kingdom to which section 236 of FISMA applies.
Section 707: “Hedging relationship”
1963.This section sets out two cases in which a company is regarded as having a “hedging relationship” for the purposes of this Part. It is based on paragraph 12(14) of Schedule 26 to FA 2002.
1964.The concept of “hedging” has to do with contracts undertaken to protect the company’s assets (or to guard against increase in its liabilities) in a case where there is some form of market volatility associated with the item. The cases described in this section derive from those set out in accounting standards. Paragraph 86 of Financial Reporting Standard 26, the equivalent for UK generally accepted accounting practice of International Accounting Standard 39, describes a hedging relationship as follows:
Hedging relationships are of three types:
fair value hedge: a hedge of the exposure to changes in fair value of 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.
cash flow hedge: a hedge of the exposure to variability in cash flows that is (i) attributable to a particular risk associated with a recognised asset or liability (such as all or some future interest payments on variable rate debt) or a highly probable forecast transaction and (ii) could affect profit or loss.
hedge of a net investment in a foreign operation as defined in FRS 23.
1965.Paragraph 9 of Financial Reporting Standard 26 also provides definitions of “hedging instrument” and “hedged item”.
Section 708: “Plain vanilla contract”
1966.This section defines “plain vanilla contract”. It is based on paragraph 2(2B) of Schedule 26 to FA 2002.
1967.The term means any relevant contract except those to which a company is treated as a party under section 584, 585 or 586.
Section 709: “Securities house”
1968.This section defines “securities house” for the purposes of this Chapter. It is based on paragraphs 45J(10), 45JA(5) and 45K(4) of Schedule 26 to FA 2002.
Section 710: Other definitions
1969.This section defines a number of terms for the purposes of this Part. It is based on paragraphs 12(1), (2), (9), (11), (12), (13) and (17) and 54(1) and (4) of Schedule 26 to FA 2002.
1970.Where appropriate, terms used in this Part in connection with the business of a life assurance company take the meaning given in Chapter 1 of Part 12 of ICTA (see in particular section 431(2) of ICTA).
1971.The section does not rewrite those definitions in paragraph 54(1) of Schedule 26 to FA 2002 of terms that are no longer in use in that Schedule (for example, “UK company”) or have been replaced by other terms (for example, “nested derivative”). Nor does it rewrite the definition of “investment trust” as that is already provided by section 842 of ICTA.