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Corporation Tax Act 2009

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Chapter 3U.K.Credits and debits to be brought into account: general

IntroductionU.K.

594Overview of ChapterU.K.

(1)This Chapter contains rules of general application about the credits and debits to be brought into account for the purposes of this Part.

(2)In particular, it—

(a)sets out the general principles which are to apply in relation to the bringing into account of credits and debits, including the use of generally accepted accounting practice and the taking into account of related transactions (see sections 595 and 596),

(b)makes provision about the interpretation of the expression “amounts recognised in determining a company's profit or loss” (see sections 597 to 599),

(c)makes provision in relation to the application of fair value accounting (see sections 600 to 603),

(d)sets out some general rules which differ from generally accepted accounting practice (see sections 604 and 605),

(e)makes provision about exchange gains and losses (see section 606),

(f)makes provision about pre-contract or abortive expenses (see section 607),

(g)makes provision about companies ceasing to be parties to derivative contracts and companies moving abroad (see sections 608 to 610), and

(h)makes provision in relation to statutory insolvency arrangements (see section 611).

General principlesU.K.

595General principles about the bringing into account of credits and debitsU.K.

(1)This Part operates by reference to the accounts of companies and amounts recognised for accounting purposes in those accounts.

(2)The general rule is that the amounts to be brought into account by a company as credits or debits for any period for the purposes of this Part are those which are recognised in determining the company's profit or loss for the period in accordance with generally accepted accounting practice (but this is subject to subsections (3) and (4)).

(3)The credits and debits to be brought into account in respect of a company's derivative contracts are the amounts which, when taken together, fairly represent for the accounting period in question—

(a)all profits and losses of the company which arise to it from its derivative contracts and related transactions (excluding expenses), and

(b)all expenses incurred by the company under or for the purposes of those contracts and transactions.

(4)Expenses are only treated as incurred as mentioned in subsection (3)(b) if they are incurred directly—

(a)in bringing any of the derivative contracts into existence,

(b)in entering into or giving effect to any of the related transactions,

(c)in making payments under any of those contracts or as a result of any of those transactions, or

(d)in taking steps to ensure the receipt of payments under any of those contracts or in accordance with any of those transactions.

(5)For the treatment of pre-contract or abortive expenses, see section 607.

(6)In subsection (3) “profits and losses” includes profits and losses of a capital nature.

(7)This section is subject to the following provisions of this Part.

(8)For the meaning of “related transaction” see section 596.

596Meaning of “related transaction”U.K.

(1)In this Part “related transaction”, in relation to a derivative contract, means any disposal or acquisition (in whole or in part) of rights or liabilities under the contract.

(2)For this purpose the cases where there is taken to be such a disposal or acquisition include—

(a)those where rights or liabilities under the derivative contract are transferred or extinguished by any sale, gift, surrender or release, and

(b)those where the contract is discharged by performance in accordance with its terms.

Amounts recognised in determining a company's profit or lossU.K.

597Amounts recognised in determining a company's profit or lossU.K.

(1)References in this Part to an amount recognised in determining a company's profit or loss for a period are to an amount recognised in—

(a)the company's profit and loss account, income statement or statement of comprehensive income for that period,

(b)the company's statement of total recognised gains and losses, statement of recognised income and expense, statement of changes in equity or statement of income and retained earnings for that period, or

(c)any other statement of items recognised in calculating the company's profits and losses for that period.

(2)If, in accordance with generally accepted accounting practice, an amount is shown as a prior period adjustment in any statement within subsection (1), it must be brought into account for the purposes of this Part in calculating the company's profits and losses for the period to which the statement relates.

(3)Subsection (2) does not apply to an amount recognised for accounting purposes by way of correction of a fundamental error.

598Regulations about recognised amountsU.K.

(1)The Treasury may by regulations make provision—

(a)excluding amounts of a specified description from section 597(1) (amounts recognised in determining a company's profit or loss),

(b)requiring amounts of a specified description which are not within section 597(1) to be brought into account in determining a company's profit or loss for a period in specified circumstances, and

(c)as to the way in which any such amounts are to be brought into account.

(2)For the purposes of subsection (1)(b), it does not matter whether the amounts are not within section 597(1) because of regulations under subsection (1)(a) or otherwise.

(3)The regulations may (in particular) make provision by reference to the fact that amounts derive from or otherwise relate to amounts brought into account in a specified way in a previous period of account.

(4)The regulations may—

(a)make different provision for different cases, and

(b)make provision subject to an election or to other specified conditions.

(5)The regulations may apply, exclude or modify any of the provisions of this Part in relation to cases for which provision is made by the regulations.

(6)The regulations may apply to periods of account beginning before they are made, but not earlier than the beginning of the calendar year in which they are made.

599Meaning of “amounts recognised for accounting purposes”U.K.

(1)If a company—

(a)draws up accounts which are not GAAP-compliant accounts, or

(b)does not draw up accounts at all,

this Part applies as if GAAP-compliant accounts had been drawn up.

(2)Accordingly, references in this Part to amounts recognised for accounting purposes include references to the amounts which would have been recognised if GAAP-compliant accounts had been drawn up for the period of account in question and any relevant earlier period.

(3)For this purpose a period of account is relevant to a later period if the accounts for the later period rely to any extent on amounts derived from the earlier period.

(4)In this section “GAAP-compliant accounts” means accounts drawn up in accordance with generally accepted accounting practice.

[F1599AAmounts not fully recognised for accounting purposes: introductionU.K.

(1)Section 599B applies for the purpose of determining the credits and debits which a company is to bring into account for a period for the purposes of this Part in the following case.

(2)The case is where—

(a)the company is, or is treated as, a party to a derivative contract in the period, [F2and]

[F3(b)as a result of tax avoidance arrangements to which the company is at any time a party, an amount is (in accordance with generally accepted accounting practice) not fully recognised for the period in respect of the contract.]

F4(3). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F4(4). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F4(5). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F4(5A). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F4(5B). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(6)For the purposes of this section an amount is not fully recognised for a period in respect of a contract of a company F5... if—

(a)no amount in respect of the contract F6... is recognised in determining its profit or loss for the period, or

(b)an amount is so recognised in respect of only part of the contract F6....]

[F7(7)For the purposes of this section arrangements are “tax avoidance arrangements” if the main purpose, or one of the main purposes, of any party to the arrangements, in entering into them, is to obtain a tax advantage.

(8)In subsection (7)—

(a)arrangements” includes any arrangements, scheme or understanding of any kind, whether or not legally enforceable, involving a single transaction or two or more transactions, and

(b)tax advantage” has the meaning given by section 1139 of CTA 2010.

(9)For the purposes of this section a company is to be treated as a party to a derivative contract even though it has disposed of its rights and liabilities under the contract to another person—

(a)under a repo or stock lending arrangement, or

(b)under a transaction which is treated as not involving any disposal as a result of section 26 of TCGA 1992 (mortgages and charges not to be treated as disposals).]

Textual Amendments

F1Ss. 599A, 599B inserted (with effect in accordance with Sch. 30 para. 3(3)(4) of the amending Act) by Finance Act 2009 (c. 10), Sch. 30 para. 3(1)

F2Word in s. 599A(2)(a) inserted (19.7.2011) (with effect in accordance with Sch. 4 para. 13 of the amending Act) by Finance Act 2011 (c. 11), Sch. 4 para. 8(2)(a)

F3S. 599A(2)(b) substituted (19.7.2011) for s. 599A(2)(b) (with effect in accordance with Sch. 4 para. 13 of the amending Act) by Finance Act 2011 (c. 11), Sch. 4 para. 8(2)(b)

F4Ss. 599A(3)-(5B) omitted (19.7.2011) (with effect in accordance with Sch. 4 para. 13 of the amending Act) by virtue of Finance Act 2011 (c. 11), Sch. 4 para. 8(3)

F5Words in s. 599A(6) omitted (19.7.2011) (with effect in accordance with Sch. 4 para. 13 of the amending Act) by virtue of Finance Act 2011 (c. 11), Sch. 4 para. 8(4)(a)

F6Words in s. 599A(6)(a)(b) omitted (19.7.2011) (with effect in accordance with Sch. 4 para. 13 of the amending Act) by virtue of Finance Act 2011 (c. 11), Sch. 4 para. 8(4)(b)

F7Ss. 599A(7)-(9) inserted (19.7.2011) (with effect in accordance with Sch. 4 para. 13 of the amending Act) by Finance Act 2011 (c. 11), Sch. 4 para. 8(5)

[F1599BDetermination of credits and debits where amounts not fully recognisedU.K.

(1)In determining the credits and debits which a company is to bring into account for the period referred to in section 599A(1) for the purposes of this Part in respect of the derivative contract mentioned in section 599A(2), the assumption in subsection (2) is to be made.

(2)The assumption is that an amount in respect of the whole of the contract in question is recognised in determining the company's profit or loss for the period.

[F8(2A)But no debits are, as a result of this section, to be brought into account by the company in respect of the derivative contract.]

(3)The credits and debits which are to be brought into account for the purposes of this Part by the company in respect of the contract are to be determined on the basis of fair value accounting.]

[F9(4)If—

(a)the company is, or is treated as, a party to the contract at the beginning of the period referred to in section 599A(1), and

(b)the fair value of the contract at that time is greater than the carrying value of that contract at that time,

a credit of an amount equal to the difference is to be brought into account for that period for the purposes of this Part in respect of the contract.]

Textual Amendments

F1Ss. 599A, 599B inserted (with effect in accordance with Sch. 30 para. 3(3)(4) of the amending Act) by Finance Act 2009 (c. 10), Sch. 30 para. 3(1)

F8S. 599B(2A) inserted (19.7.2011) (with effect in accordance with Sch. 4 para. 13 of the amending Act) by Finance Act 2011 (c. 11), Sch. 4 para. 9(2)

F9S. 599B(4) inserted (19.7.2011) (with effect in accordance with Sch. 4 para. 13 of the amending Act) by Finance Act 2011 (c. 11), Sch. 4 para. 9(3)

Application of fair value accountingU.K.

600Contract which is or forms part of financial asset or liabilityU.K.

(1)This section applies to a derivative contract which meets the condition in section 579(1)(b) (contract which is or forms part of a financial asset or liability for accounting purposes).

(2)The amounts to be brought into account in accordance with this Part in respect of the contract are to be determined on the basis of fair value accounting.

601Contract relating to holding in OEIC, unit trust or offshore fundU.K.

(1)This section applies if a company is a party in an accounting period to a relevant contract which is treated as a derivative contract under section 587 (contract relating to holding in OEIC, unit trust or offshore fund).

(2)The credits and debits which are to be brought into account in accordance with this Part in respect of the relevant contract are to be determined on the basis of fair value accounting.

602Contract becoming one relating to holding in OEIC, unit trust or offshore fundU.K.

(1)This section applies if—

(a)a company is a party to a relevant contract in two successive accounting periods,

(b)section 587 (contract relating to holding in OEIC, unit trust or offshore fund) applies in relation to the relevant contract for the second accounting period but not the first accounting period, and

(c)immediately before the beginning of the second accounting period the relevant contract was a chargeable asset.

(2)For the purposes of section 601(2), the opening valuation of the contract as at the beginning of the second accounting period is taken to be equal to the market value of the contract.

(3)In subsection (2) “the market value of the contract” means the amount which would have been the market value of the contract for the purposes of corporation tax on chargeable gains if it had been disposed of immediately before the end of the first accounting period.

(4)For the rules which apply where the company ceases to be a party to the contract, see section 660 (company ceasing to be party to contract relating to holding in OEIC, unit trust or offshore fund).

603Associated transaction treated as derivative contractU.K.

(1)This section is to be read as if it were in Chapter 7 (shares with guaranteed returns etc) of Part 6 (relationships treated as loan relationships etc).

(2)See, in particular, section 532(3) (meaning of “associated transaction”).

(3)Subsection (4) applies if credits and debits are required to be brought into account in accordance with this Part in respect of any associated transaction because of section 588 (which treats such a transaction which is not a derivative contract as if it were).

(4)Those credits and debits are to be determined on the basis of fair value accounting.

Rules differing from generally accepted accounting practiceU.K.

604Credits and debits treated as relating to capital expenditureU.K.

(1)This section applies if generally accepted accounting practice allows a credit or debit for an accounting period in respect of a company's derivative contract to be treated in the company's accounts as an amount recognised in determining the value of a fixed capital asset or project.

(2)Despite that treatment, the credit or debit must be brought into account in accordance with this Part, in the accounting period for which it is given, in the same way as a credit or debit which is recognised in determining the company's profit or loss for that period in accordance with generally accepted accounting practice.

(3)But subsection (2) does not apply to a debit which is recognised in arriving at the amount of expenditure in relation to which a debit may be given by Part 8 (intangible fixed assets).

(4)Subsection (5) applies if a debit is recognised as mentioned in subsection (1).

(5)No debit may be brought into account in accordance with this Part in respect of—

(a)the writing down of so much of the value of the asset or project, or

(b)so much of any amortisation or depreciation as represents a writing off of that value,

as is attributable to that debit.

605Credits and debits recognised in equityU.K.

(1)This section applies if in accordance with generally accepted accounting practice a credit or debit for a period in respect of a company's derivative contract—

(a)is recognised in equity or shareholders' funds, and

(b)is not recognised in any of the statements mentioned in section 597(1) (amounts recognised in determining a company's profit or loss).

(2)The credit or debit must be brought into account for the period in accordance with this Part in the same way as a credit or debit which is recognised in determining the company's profit or loss for the period in accordance with generally accepted accounting practice.

[F10Exchange gains and losses]U.K.

Textual Amendments

F10Pt. 7 Ch. 3 crossheading substituted (with effect in accordance with Sch. 21 para. 11 of the commencing Act) by Finance Act 2009 (c. 10), Sch. 21 para. 5

606Exchange gains and lossesU.K.

(1)The reference in section 595(3) to the profits and losses arising to a company from its derivative contracts includes a reference to exchange gains and losses so arising.

(2)Subsection (1) is subject to subsections [F11 (2A),] (3) and (4).

[F12(2A)Subsection (1) does not apply to an exchange gain or loss of an investment company (within the meaning of section 17 of CTA 2010) which would not have arisen but for a change in the company's functional currency (within the meaning of section 17(4) of that Act) as between—

(a)the period of account of the company in which the gain or loss arises, and

(b)a period of account of the company ending in the 12 months immediately preceding that period.]

(3)Subsection (1) does not apply to an exchange gain or loss of a company so far as—

[F13(a)condition A or B is met, and]

(b)it is recognised in the company's statement of total recognised gains and losses, statement of recognised income and expense, statement of changes in equity or statement of income and retained earnings.

(4)Subsection (1) does not apply to [F14an exchange gain or loss of a company so far as—

(a)condition A is met, and

(b)it] is within a description specified for the purpose in regulations made by the Treasury.

[F15(4A)Condition A is that the exchange gain or loss arises in relation to a derivative contract whose underlying subject matter consists wholly or partly of currency.

(4B)Condition B is that the exchange gain or loss arises as a result of the translation from one currency to another of the profit or loss of part of the company's business.

(4C)Subsection (4D) applies where—

(a)condition A is met, and

(b)the amount that is recognised in respect of the exchange gain or loss as mentioned in subsection (3)(b) (“the recognised gain or loss”) is not calculated by reference to spot rates of exchange.

(4D)Where this subsection applies—

(a)the recognised gain or loss is to be treated for the purposes of this Part as comprising two separate exchange gains or losses, namely—

(i)an exchange gain or loss calculated by reference to spot rates of exchange, and

(ii)a residual exchange gain or loss, and

(b)subsections (3) and (4) do not have effect in relation to the residual exchange gain or loss.]

[F16(4E)Subsections (3) and (4) do not have effect to disapply subsection (1) in the case of an exchange gain arising in an accounting period of a company so far as—

(a)the exchange gain arises in relation to a derivative contract whose underlying subject matter consists wholly or partly of currency,

(b)the derivative contract is part of arrangements that have a one-way exchange effect in relation to the company in the accounting period (see section 606A), and

(c)the arrangements cause the company or any other company to gain a tax advantage (other than a negligible tax advantage).]

(5)The Treasury may by regulations make provision for or in connection with bringing into account in specified circumstances amounts to which subsection (1) does not apply because of subsection (3) or (4).

(6)The reference in subsection (5) to bringing amounts into account is a reference to bringing amounts into account—

(a)for the purposes of this Part as credits or debits arising to a company from its derivative contracts, or

(b)for the purposes of corporation tax on chargeable gains.

(7)The regulations may—

(a)make different provision for different cases, and

(b)make provision subject to an election or to other specified conditions.

(8)For the meaning of references to exchange gains or losses from derivative contracts, see section 705.

Textual Amendments

F11Word in s. 606(2) inserted (19.7.2011) (with effect in accordance with Sch. 7 para. 8 of the amending Act) by Finance Act 2011 (c. 11), Sch. 7 para. 7(2)

F12S. 606(2A) inserted (19.7.2011) (with effect in accordance with Sch. 7 para. 8 of the amending Act) by Finance Act 2011 (c. 11), Sch. 7 para. 7(3)

F13S. 606(3)(a) substituted (with effect in accordance with Sch. 21 para. 11 of the amending Act) by Finance Act 2009 (c. 10), Sch. 21 para. 6(2)

F14Words in s. 606(4) substituted (with effect in accordance with Sch. 21 para. 11 of the amending Act) by Finance Act 2009 (c. 10), Sch. 21 para. 6(3)

F15S. 606(4A)-(4D) inserted (with effect in accordance with Sch. 21 para. 11 of the amending Act) by Finance Act 2009 (c. 10), Sch. 21 para. 6(4)

F16S. 606(4E) inserted (with effect in accordance with Sch. 21 para. 11 of the amending Act) by Finance Act 2009 (c. 10), Sch. 21 para. 6(5)

Modifications etc. (not altering text)

C1S. 606(3)(4) excluded by SI 2004/3256 reg. 7A(7) (as inserted (with application in accordance with reg. 1(2) of the amending S.I.) by Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2009 (S.I. 2009/1886), regs. 1(1), 5)

[F17606AArrangements that have a “one-way exchange effect”U.K.

(1) For the purposes of section 606 arrangements (“the arrangements”) have a “ one-way exchange effect ” in relation to a company (“company A”) in an accounting period of that company (“ the relevant accounting period ”) if the following two conditions are met.

(2)The first condition is that the arrangements include an option or a relevant contingent contract.

(3)The second condition is that, in relation to any day in the relevant accounting period (“the test day”)—

(a)amount A is not equal to amount B, and

(b)the difference between amounts A and B is not the same as it would be were those amounts calculated disregarding the matching rules.

(4)Amount A is—

(a)the sum of the relevant exchange losses of company A, and of each company connected with company A, that arise in accounting periods of those companies that end on the test day, less

(b)the sum of the relevant exchange gains of those companies that arise in such accounting periods.

(5)Amount B is—

(a)the sum of the relevant exchange gains of company A, and of each company connected with company A, that would have arisen in accounting periods of those companies that end on the test day, less

(b)the sum of the relevant exchange losses of those companies that would have arisen in such accounting periods,

if exchange gains and losses of those companies in those accounting periods were calculated in accordance with section 606D (counterfactual currency movement assumptions).

(6)For the purposes of subsections (4) and (5) an accounting period of company A, or of a company connected with company A, in which the test day falls and that does not end on that day is to be treated as if it did end on that day.

(7) In this section “ the matching rules ” means—

(a)section 328(3) and (4), and

(b)section 606(3) and (4).

Textual Amendments

F17Ss. 606A-606H inserted (with effect in accordance with Sch. 21 para. 11 of the commencing Act) by Finance Act 2009 (c. 10), Sch. 21 para. 7

606BMeaning of “relevant exchange gain” and “relevant exchange loss”U.K.

(1)For the purposes of section 606A an exchange gain or loss of a company is “relevant” if—

(a)it arises in relation to—

(i)an asset or liability representing a loan relationship to which the company is a party, or

(ii)a relevant contract to which the company is a party,

(b)the loan relationship or relevant contract is part of the arrangements, and

(c)a debit or credit in respect of the exchange gain or loss is required to be brought into account by the company for the purposes of corporation tax.

(2)For the purposes of subsection (1)(c)—

(a)the arrangements are to be treated as not having a one-way exchange effect in relation to the company for the purposes of section 328 or 606 (whether or not they would have such an effect apart from this subsection), and

(b)sections 441 and 442 (loan relationships: unallowable purposes) and 690 to 692 (derivative contracts: unallowable purposes) are to be disregarded.

Textual Amendments

F17Ss. 606A-606H inserted (with effect in accordance with Sch. 21 para. 11 of the commencing Act) by Finance Act 2009 (c. 10), Sch. 21 para. 7

606CMeaning of “test day”U.K.

(1)This section makes provision for the purposes of section 606A as to whether a day in an accounting period of company A is a “test day”.

(2)In the case of arrangements that include one or more options, a day in the accounting period is a “test day” if it is—

(a)a day on which such an option is exercised,

(b)a day on which such an option that is not exercised in the accounting period was capable of being exercised,

(c)a day on which company A, or a company connected with company A, ceased to be a party to such an option,

(d)a day on which a terms of such an option are varied, or

(e)the last day of the accounting period.

(3)In the case of arrangements that include one or more relevant contingent contracts, a day in the accounting period is a “test day” if it is—

(a)a day on which an operative condition of such a contract is met,

(b)a day on which company A, or a company connected with company A, ceased to be a party to such a contract,

(c)a day on which a terms of such a contract are varied, or

(d)the last day of the accounting period.

Textual Amendments

F17Ss. 606A-606H inserted (with effect in accordance with Sch. 21 para. 11 of the commencing Act) by Finance Act 2009 (c. 10), Sch. 21 para. 7

606DCounterfactual currency movement assumptionsU.K.

(1)This section makes provision for the purposes of section 606A(5) as to the calculation of exchange gains and losses of a company arising in an accounting period of that company.

(2)Where the relevant foreign currency appreciates over the accounting period, or any part of the accounting period, relative to the operating currency of company A by any percentage, the calculation must be made on the assumption that the relevant foreign currency instead depreciates (over the same period and in relation to the same currency) by that percentage.

(3)Where the relevant foreign currency depreciates over the accounting period, or any part of the accounting period, relative to the operating currency of company A by any percentage, the calculation must be made on the assumption that the relevant foreign currency instead appreciates (over the same period and in relation to the same currency) by that percentage.

(4)For provision as to the treatment of certain options for the purposes of the calculation in cases in which subsection (2) or (3) applies, see section 606E.

(5)Except as provided for in that section, the calculation must be made on the basis of transactions in fact entered into (and not on the basis of transactions that would have been entered into on the assumption specified in subsection (2) or (3)).

(6) In this section “ relevant foreign currency ” means—

(a)the currency in which the loan relationships or relevant contracts in respect of which the exchange gains or losses arise are denominated, or

(b)where the exchange gains or losses arise in respect of loan relationships or relevant contracts denominated in more than one currency, any of them.

(7)References in this section to the “operating currency” of a company, in relation to an accounting period, are (subject to subsection (8)) to the currency in which profits or losses of the company arising in that accounting period that fall to be computed in accordance with generally accepted accounting practice for corporation tax purposes are required to be computed by virtue of section 92(1), 92A(2), 92B(2)(a) or 92C(3)(a) of FA 1993 (foreign currency accounting).

(8)In relation to a loan relationship or relevant contract to which a company is deemed to be a party under—

(a)section 381(2) and (3) (loan relationships involving firms), or

(b)section 620(2) (relevant contracts involving firms),

references in this section to the “operating currency” of the company, in relation to an accounting period, are to the currency that would be the operating currency of that firm in that accounting period if that firm were a company.

Textual Amendments

F17Ss. 606A-606H inserted (with effect in accordance with Sch. 21 para. 11 of the commencing Act) by Finance Act 2009 (c. 10), Sch. 21 para. 7

606ECounterfactual currency movement assumptions: treatment of optionsU.K.

(1)This section applies in relation to the calculation for the purposes of section 606A(5) of exchange gains and losses of a company arising in an accounting period of that company where—

(a)the calculation is made on the assumption specified in subsection (2) or (3) of section 606D (“the relevant assumption”), and

(b)an option is part of the arrangements.

(2)Subsection (3) applies if the option is exercised on the test day.

(3)The option is to be treated as not having been exercised on the test day if, on the relevant assumption, it is in all the circumstances more likely than not that it would not have been exercised on that day.

(4)Subsection (5) applies if the option is not exercised on the test day but was exercisable on that day.

(5)The option is to be treated as having been exercised on the test day if, on the relevant assumption, it is in all the circumstances more likely than not that it would have been exercised on that day.

Textual Amendments

F17Ss. 606A-606H inserted (with effect in accordance with Sch. 21 para. 11 of the commencing Act) by Finance Act 2009 (c. 10), Sch. 21 para. 7

606FMeaning of “option”U.K.

(1) In the Part 7 one-way exchange effect provisions “ option ” is to be construed as if section 580(2) and (3) (meaning of option) were omitted.

(2)For the purposes of the Part 7 one-way exchange effect provisions—

(a) section 584 (hybrid derivatives with embedded derivatives) is to be construed as if in subsection (1)(b) for the words “in accordance with generally accepted accounting practice, the company treats” there were substituted “ it is possible to regard ” ,

(b) section 585 (loan relationships with embedded derivatives) is to be construed as if in subsection (1) for the words “in accordance with generally accepted accounting practice a company treats” there were substituted “ it is possible to regard ” , and

(c) section 586 (other contracts with embedded derivatives) is to be construed as if in subsection (1)(b) for the words “in accordance with generally accepted accounting practice, treats” there were substituted “ it is possible to regard ” .

Textual Amendments

F17Ss. 606A-606H inserted (with effect in accordance with Sch. 21 para. 11 of the commencing Act) by Finance Act 2009 (c. 10), Sch. 21 para. 7

606GMeaning of “relevant contingent contract” and “operative condition”U.K.

(1) In the Part 7 one-way exchange effect provisions “ relevant contingent contract ” means a contract that meets the following two conditions.

(2) The first condition is that company A, or a company connected with company A (“ the relevant company ”), is a party to the contract.

(3)The second condition is that the contract includes a condition—

(a)on the meeting of which a right or liability under the contract is altered, and

(b)that operates (directly or indirectly) by reference to the exchange rate between the operating currency of the relevant company and another currency.

(4) In this section “ operating currency ” has the same meaning as in section 606D.

(5) In the Part 7 one-way exchange effect provisions “ operative condition ” means a condition of the kind mentioned in subsection (3).

Textual Amendments

F17Ss. 606A-606H inserted (with effect in accordance with Sch. 21 para. 11 of the commencing Act) by Finance Act 2009 (c. 10), Sch. 21 para. 7

606HOther interpretative provisionsU.K.

(1) In this Act “ the Part 7 one-way exchange effect provisions ” means sections 606A to 606G and this section.

(2)The following provisions of this section have effect for the purposes of the Part 7 one-way exchange effect provisions.

(3)References to arrangements include any agreements, understandings, schemes, transactions or series of transactions (whether or not legally enforceable).

(4)The circumstances to be taken into account in determining whether a loan relationship or relevant contract is “part of” any arrangements include (in particular)—

(a)the circumstances in which it was entered into, acquired or issued,

(b)the currency in which it is denominated, and

(c)its likely effect.

(5)References to the currency in which a relevant contract is denominated are to the currency in which its underlying subject matter is denominated.

(6)A currency (“currency A”) appreciates relative to another currency (“currency B”) over a period if—

(a)the value expressed in currency B of one unit of currency A at the end of the period, exceeds

(b)the value expressed in currency B of one unit of currency A at the beginning of the period,

and the percentage of the appreciation is the amount determined under subsection (7).

(7)The percentage of the appreciation is—

(a)the difference between the amounts mentioned in paragraphs (a) and (b) of subsection (6), expressed as a percentage of the amount mentioned in that paragraph (b), or

(b)if lower, 100%.

(8)A currency (“currency A”) depreciates relative to another currency (“currency B”) over a period if—

(a)the value expressed in currency B of one unit of currency A at the end of the period, is less than

(b)the value expressed in currency B of one unit of currency A at the beginning of the period,

and the percentage of the depreciation is the difference, expressed as a percentage of the amount mentioned in paragraph (b).

(9)References in this section to a company connected with company A are to a company connected with company A for the relevant accounting period.

(10)Section 466 (companies connected for an accounting period) applies for the purposes of subsection (9).

(11)Tax advantage” has the meaning given by [F18section 1139 of CTA 2010].

(12)See section 606A for the meaning of the following expressions—

  • “the arrangements”;

  • “company A”;

  • “the relevant accounting period”;

  • “the test day”.]

Textual Amendments

F17Ss. 606A-606H inserted (with effect in accordance with Sch. 21 para. 11 of the commencing Act) by Finance Act 2009 (c. 10), Sch. 21 para. 7

F18Words in s. 606H(11) substituted (with effect in accordance with s. 1184(1) of the amending Act) by Corporation Tax Act 2010 (c. 4), s. 1184(1), Sch. 1 para. 638 (with Sch. 2)

[F19Miscellaneous]U.K.

Textual Amendments

F19Pt. 7 Ch. 3 cross-heading inserted (with effect in accordance with Sch. 21 para. 11 of the amending Act) by Finance Act 2009 (c. 10), Sch. 21 para. 8

607Pre-contract or abortive expensesU.K.

(1)This section applies if—

(a)a company may enter into a derivative contract or related transaction but has not yet done so,

(b)it incurs any expenses for purposes connected—

(i)with entering into it, or

(ii)with giving effect to any obligation which might arise under it, and

(c)had the company entered into the contract or transaction, the expenses would be expenses within section 595(3)(b).

(2)The expenses are treated as expenses in relation to which debits may be brought into account in accordance with section 595(3) to the same extent as if the company had entered into the contract or transaction.

608Company ceasing to be party to derivative contractU.K.

(1)This section applies if—

(a)a company ceases to be a party to a derivative contract in an accounting period (the “cessation period”),

(b)profits or losses arise to the company from the derivative contract or a related transaction in that period, and

(c)the credits or debits brought into account in accordance with this Part for that period do not include credits or debits representing the whole of those profits or losses.

(2)Credits or debits in respect of so much of those profits or losses as are not represented by credits or debits brought into account for the cessation period must continue to be brought into account in accordance with this Part over one or more subsequent accounting periods (“post-cessation periods”) as in the case of a derivative contract to which the company is a party in those periods.

(3)Subsection (4) applies if any question arises how far in a post-cessation period—

(a)the company is a party to the derivative contract for the purposes of a trade it carries on, or

(b)the derivative contract is referable to a particular business the company carries on or a particular description of such business.

(4)The question is to be determined by reference to the circumstances immediately before the company ceased to be a party to the derivative contract, instead of the circumstances in the post-cessation period.

(5)Subsection (6) applies if any question arises—

(a)how far the derivative contract has a particular purpose in a post-cessation period, or

(b)whether there is a connection between the company and any other person for a post-cessation period.

(6)The question is to be determined by reference to the circumstances in the cessation period, instead of the circumstances in the post-cessation period.

(7)For the purposes of the Corporation Tax Acts, references to a person's derivative contracts and to a person being a party to a derivative contract are to be read in accordance with this section.

609Company ceasing to be UK residentU.K.

(1)If a company ceases to be UK resident, this Part applies as if—

(a)immediately before so ceasing the company had assigned the rights and liabilities under its derivative contracts for consideration of an amount equal to their fair value at that time, and

(b)it had immediately reacquired them for consideration of the same amount.

(2)Subsection (1) does not apply in relation to a derivative contract so far as immediately after the company ceases to be UK resident its rights and liabilities under the contract are held or owed for the purposes of a permanent establishment of the company in the United Kingdom.

(3)Subsection (1) does not apply if—

(a)the conditions in section 630(1)(a) and (b) are met in relation to the company (transferee leaving group after replacing transferor as party to derivative contract), and

(b)it ceases to be UK resident at the same time as it ceases to be a member of the relevant group.

(4)In subsection (3) “the relevant group” has the meaning given by section 630(4).

610Non-UK resident company ceasing to hold derivative contract for UK permanent establishmentU.K.

(1)This section applies if the rights and liabilities under a derivative contract of a company which is not UK resident cease to any extent to be held or owed for the purposes of a permanent establishment of the company in the United Kingdom in circumstances not involving a related transaction.

(2)This Part applies as if—

(a)immediately before the rights and liabilities so cease the company had assigned them, so far as so ceasing, for consideration of an amount equal to their fair value at that time, and

(b)the company had immediately reacquired them for consideration of the same amount.

(3)This section does not apply if—

(a)the conditions in section 630(1)(a) and (b) are met in relation to the company (transferee leaving group after replacing transferor as party to derivative contract), and

(b)the rights and liabilities mentioned in subsection (1) cease to be held or owed for the purposes of the permanent establishment at the same time as the company ceases to be a member of the relevant group.

(4)In subsection (3) “the relevant group” has the meaning given by section 630(4).

611Release under statutory insolvency arrangement of liability under derivative contractU.K.

No credit is required to be brought into account by a company in respect of the release of the company's liability to pay an amount under a derivative contract of the company if the release is part of a statutory insolvency arrangement.

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