Chapter 5: Continuity of treatment on transfers within groups
Section 624: Introduction to Chapter
1707.This section describes the purpose of the Chapter. Subsection (3) is based on paragraph 28(6) of Schedule 26 to FA 2002 but otherwise the section is new.
Section 625: Group member replacing another as party to derivative contract
1708.This section and the next three deal with the case where one member of a group of companies replaces another as a party to a derivative contract as the result of a related transaction or similar transactions. This section determines the credits and debits to be brought into account by the transferor company and the transferee company. It is based on paragraph 28(1), (3), (3ZA), (3A) and (7) of Schedule 26 to FA 2002.
1709.“Notional carrying value” is defined in subsection (6) on the model of the similar definition in section 622(4). “Carrying value” is defined in section 702.
1710.Should any “discount” arise in respect of the related transaction or the equivalent series of transactions, it is added to the amount treated as consideration by the transferor under subsection (3) (but not to the amount treated as consideration given by the transferee under subsection (4)).
1711.“Discount” is defined in subsection (6) by reference to section 480 in Part 5 (loan relationships). A discount arises if payment of part of the consideration for a disposal is deferred and the consideration is accordingly increased to recognise the delay.
1712.Subsection (7) disapplies Schedule 28AA to ICTA in a case where credits and debits are determined under subsection (2). Schedule 28AA to ICTA might otherwise substitute market value for the amounts agreed between the parties, which amounts would give rise to credits and debits for the purposes of this Part. Such a substitution is unnecessary given that this section requires both parties to use the notional carrying value of the contract rather than amounts shown in the accounts (the amounts “recognised for accounting purposes”).
Section 626: Transactions to which section 625 applies
1713.This section defines the related transaction or series of transactions which acts or act as a trigger for the application of section 625. It is based on paragraph 28(2) of Schedule 26 to FA 2002.
Section 627: Meaning of company replacing another as party to derivative contract
1714.This section gives a particular example of what the reference in section 625(1) to one company replacing another as a party to a derivative contract means. It is based on paragraph 28(4) of Schedule 26 to FA 2002.
1715.The commonest way in which one company may replace another as a party to a derivative contract is by the assignment of the rights and liabilities under the contract. But there may be other types of transaction that have the same effect.
1716.This section ensures that, if the company referred to as the transferee in section 625 becomes a party to a contract whose rights and liabilities are equivalent to those of the contract to which the company referred to as the transferor in that section has ceased to be a party, the transferee is treated as having replaced the transferor in respect of the derivative contract. A novation is an example of this.
1717.This section still applies in the event of the transferor again becoming a party to the original contract (that is, a contract to which it had previously ceased to be a party).
Section 628: Transferor using fair value accounting
1718.This section substitutes rules based on fair value accounting for those in section 625, in a case to which that section applies, if the transferor uses fair value accounting in respect of the derivative contract in question. It is based on paragraph 30 of Schedule 26 to FA 2002.
1719.As regards the transferee, this section treats it as having acquired the derivative contract at the fair value of the contract as at the time of the transfer for the purposes of determining the credits and debits brought into account under this Part, regardless of whether it itself uses fair value accounting as respects the contract. This treatment continues to apply for any accounting period in which the transferee is a party to the contract.
1720.As in section 625, any “discount” is added to the amount treated as consideration by the transferor (only).
Section 629: Tax avoidance
1721.This section disapplies section 625 in two cases where avoidance of tax is involved. It is based on paragraph 28(3ZB), (3ZC) and (3ZD) of Schedule 26 to FA 2002.
1722.The first case (subsection (1)) is if the transferor is a party to arrangements for tax avoidance purposes under which the derivative contract will be transferred on by the transferee. The second case (subsection (4)) is if another provision countering tax avoidance (section 698) applies to a disposal which would otherwise be within section 625.
Section 630: Introduction to sections 631 and 632
1723.This section and the next two provide for a deemed assignment of the derivative contract in question if a transferee within section 625 ceases to be a member of the group of companies mentioned in section 626(2) or (3). This section sets out when sections 631 and 632 apply and defines terms used in this and those sections. It is based on paragraph 30A(1), (5A) and (8) of Schedule 26 to FA 2002.
1724.If section 625 applies because of a series of transactions within section 626(3), the relevant time limit in respect of the transferee leaving the relevant group of companies before the end of a six year period begins with the last of the transactions in the series of transactions. This contrasts with the rule in section 625(3) which determines the consideration to be brought into account by the transferor by reference to the first transaction in the series.
1725.The rules in these sections take priority if the rules in section 609 or 610 would apply in the same circumstances (see the commentary on those sections).
Section 631: Transferee leaving group otherwise than because of exempt distribution
1726.This section deems the transferee within section 625 to have assigned (and immediately reacquired) the rights and liabilities under the derivative contract, immediately before it left the group, for a consideration equal to their fair value at that time. It is based on paragraph 30A(2), (3), (4), (5) and (8) of Schedule 26 to FA 2002.
1727.One of the conditions for this section to apply is that the company ceases to be a member of the group of companies in question for reasons which are not just that it does so because of an “exempt distribution” under section 213(2) of ICTA. That section provides for a distribution arising from the demerger of the trading activities of a single company or group of companies to a number of companies or groups to be disregarded for certain purposes.
1728.The second condition is that a credit would be brought into account under either this Part (condition A in subsection (3)) or Part 5 (loan relationships) (condition B in subsection (4)). The credit in question, as regards this Part, is the credit that would be brought into account under this Part on the deemed assignment under this section of the rights and liabilities under the derivative contract.
1729.As regards Part 5, the credit in question is the credit brought into account under that Part because of section 345(2)(a) and (b) in a case where the transferee has a “hedging relationship” between the derivative contract and a creditor relationship That section makes matching provision for loan relationships to that made by this section for derivative contracts.
1730.In either case, the second condition is not satisfied if the assignment would give rise to a debit. So the section cannot give rise to a reduction of the transferee’s liability to corporation tax.
1731.“Hedging relationship” is described in section 707 in a number of ways. Broadly, these relate to cases where the derivative contract is entered into to shelter the company from risks associated with holding or owing the hedged asset or liability (such as a fluctuation in values because of movement in a relevant market, such as a stock or commodities exchange).
Section 632: Transferee leaving group because of exempt distribution
1732.This section deems the transferee within section 625 to have assigned (and immediately reacquired) the rights and liabilities under the derivative contract at the time a “chargeable payment” is made, for a consideration equal to the fair value of the rights and liabilities at the time of that payment, if it left the group solely because of an exempt distribution. It is based on paragraph 30A(3), (4), (5), (6), (7) and (8) of Schedule 26 to FA 2002.
1733.A “chargeable payment” is broadly a payment made in connection with tax avoidance or otherwise than for genuine commercial reasons.
1734.Conditions A and B, in subsections (3) and (4), are the same as the conditions in section 631(3) and (4). See the commentary on that section.
