Section 46 Schedule 16: Risk Transfer Schemes
Summary
1.Section 46 and Schedule 16 provide legislation that restricts Exchequer exposure to losses from overhedging and underhedging structures (“risk transfer schemes”) to the real economic loss from those transactions. This is achieved by ensuring that any losses from these arrangements, other than the real economic loss at group level, are ring-fenced and can only be offset against profits from the same arrangements.
Details of the Schedule
2.Paragraphs 1 and 2 are consequential amendments to the Corporation Tax Act (CTA) 2010.
3.Paragraph 3 inserts new sections 937A to 937O into CTA 2010.
4.New section 937A contains an overview of the provisions relating to risk transfer schemes.
5.New section 937B identifies risk transfer schemes that are group schemes or single company schemes.
6.New subsection (1) sets out that a risk transfer scheme can be a “group scheme” or, if it is not, is a “single company scheme”. The risk transfer scheme provisions apply to single company schemes with modification; as per new subsection (4).
7.New subsection (2) defines risk transfer schemes that are a “group scheme” This is that at least one other company is both associated with the relevant company and also party to the same scheme. The term “associated with” is defined at new section 937K.
8.New subsection (3) defines “the relevant group” for the purposes of these provisions. This the company that is party to the risk transfer scheme along with any other company that is associated with that company and is party to the same scheme (as per new subsection (2)).
9.New subsection (4) sets out that the risk transfer scheme provisions are modified in the case of single company schemes. These modifications are set out at new subsection (5).
10.New subsection (5) sets out the modifications that are made to the risk transfer scheme provisions where the relevant scheme is a single company scheme. These are that all references to the “relevant group”, or members of the relevant group, are taken as being a reference to “company A”. Additionally, new sections 937E(2) and 937L(2) are to be treated as omitted.
11.New section 937C sets out the meaning of a “risk transfer scheme”.
12.New subsection (1) sets out that in order for a company to be party to a “risk transfer scheme” then three conditions (defined in new subsections (2), (4) and (5)) must all be met.
13.New subsection (2) is Condition 1. This is that the main purpose, or one of the main purposes, of any member of the relevant group on entering into the scheme is to obtain a “financial advantage” for the relevant group. It must be reasonable to assume that the “financial advantage” could not otherwise have been obtained without the relevant group becoming subject to (or incurring the cost of avoiding) a “relevant risk”. The terms “financial advantage” and “a relevant risk” are defined at new subsections (6) and (3) respectively.
14.New subsection (3) defines the term “a relevant risk”. This is that, due to fluctuations in any sort of price or value (including rates of currency exchange between two currencies and the retail price index) the relevant group is subject to the risk of making an “economic loss”. “Economic loss” is defined at new section 937L.
15.New subsection (4) is Condition 2. This is that the result of the scheme (ignoring the operation of these provisions) causes the relevant group not to be subject to the relevant risk, or is subject only to a negligible proportion of that risk.
16.New subsection (5) is Condition 3. This is that if it were not for the operation of the Corporation Tax Acts, Condition 3 would be failed. In other words, that it is the operation of the Corporation Tax Acts that allows the relevant group not to be subject to (or only subject to a negligible proportion of) the relevant risk.
17.New subsection (6) defines the term “financial advantage”. This is that, combining the impact of the scheme on each member of the relevant group, the effect of the scheme is to increase returns on an investment, reduce the cost of borrowing or have an effect economically equivalent to either of those effects.
18.New section 937D provides the meaning of “the scheme, rate, index or value”. This is the rate, index or value that is relevant to the risk transfer scheme i.e. the one that is mentioned at new sections 937(3)(a), (b) or (c).
19.New section 937E provides the meaning of “scheme loss” and “scheme profit”.
20.New subsection (1) explains that a loss or profit made by a company is a “scheme loss” or “scheme profit” in relation to a risk transfer scheme if the scheme loss or profit is from a loan relationship or derivative contract that is part of the scheme and would, apart from the operation of these rules, be brought into account under the loan relationship rules (part 5 of CTA 2009) or derivative contract rules (part 7 of CTA 2009). The profit or loss must also have arisen due to fluctuations in the relevant rate, index or value pertaining to the scheme.
21.New subsection (2) clarifies that where a scheme profit or loss is required to be calculated over a period that is not an accounting period of the relevant company, then any reference to scheme profit or scheme loss would be that arising on the basis that the relevant period was an accounting period of the company.
22.New subsection (3) clarifies that the reference in new subsection (1) to a loss or profit from a loan relationship or derivative contract includes a loss or profit from a related transaction or one that is capital in nature.
23.New subsection (4) defines “related transaction” for the purposes of new subsection (3)(a) as being in accordance with its normal meaning in the loan relationship and derivative contract rules, as provided in sections 304 and 596 of CTA 2009 respectively.
24.New section 937F makes provision for how to calculate “ring-fenced scheme losses” and “relevant scheme profits”.
25.New subsection (1) provides that new subsection (2) will apply if a company makes one or more scheme losses in an accounting period in relation to a risk transfer scheme and, ignoring profits and losses made by the group not as a result of the scheme, then the relevant group makes a pre-tax economic loss in the relevant period as a result of movements in the relevant rate, index or value pertaining to the scheme.
26.New subsection (2) provides that the “relevant proportion” of each scheme loss made by a company is a “ring fenced scheme loss”. The relevant proportion is calculated as per new subsection (3)
27.New subsection (3) defines the “relevant proportion” as being the total of “A” less “B” less “C” expressed as a proportion of “A”. “A” is the total of the scheme losses made in the period in relation to the scheme by members of the relevant group. “B” is the total of the scheme profits made in the period in relation to the scheme by members of the relevant group. “C” is the pre-tax economic loss referred to in new subsection (1)(b).
28.New subsection (4) provides that new subsection (5) will apply if a company makes one or more scheme profits in an accounting period in relation to a risk transfer scheme and, ignoring profits and losses made by the group not as a result of the scheme, the relevant group makes a pre-tax economic profit in the relevant period as a result of movements in the relevant rate, index or value pertaining to the scheme.
29.New subsection (5) provides that the relevant proportion of each scheme profit made by the company in the accounting period is a “relevant scheme profit”.
30.New subsection (6) defines the relevant proportion as being the total “A” less “B” less “C” expressed as a proportion of “A”. “A” is the total of the scheme profits made in the period in relation to the scheme by members of the relevant group. “B” is the total of the scheme losses made in the period in relation to the scheme by members of the relevant group. “C” is the pre-tax economic profit referred to in new subsection (4)(b).
31.New section 937G deals with the treatment of ring-fenced scheme losses in the accounting period in which they are made.
32.New subsection (1) provides that this section applies when a company is required to calculate the amount of ring-fenced scheme loss that can be brought into account by a company in the same accounting period in which that loss arose.
33.New subsection (2) provides that no ring-fenced scheme loss can be brought into account if the company’s profits pool, for the same scheme, at the start of the accounting period is nil.
34.New subsection (3) applies where there are amounts in the company’s profits pool at the beginning of the relevant accounting period but that amount is less than the amount of the ring-fenced scheme losses made by the company in the relevant period in relation to the same scheme. Where that is the case, only the “relevant proportion” of the ring-fenced scheme loss may be brought into account. The “relevant proportion” is calculated as per new subsection (4).
35.New subsection (4) provides the calculation of the “relevant proportion” for the purposes of new subsection (3). This is the amount of the company’s profits pool at the start of the accounting period divided by the total of the ring-fenced scheme losses in the period made by that company that relate to the same scheme.
36.New subsection (5) provides that the full amount of scheme loss will be brought into account in a period where the company’s profits pool, at the beginning of the period, is greater than, or equal to, the total of ring-fenced scheme losses made by the company in that period in relation to the same scheme.
37.New subsection (6) clarifies that references to bringing a ring-fenced scheme loss into account refer to bringing it into account for the purposes of the loan relationship (Part 5 of CTA 2009) or derivative contract (Part 7 of CTA 2009) rules.
38.New section 937H deals with the treatment of ring-fenced losses in periods later than the accounting period in which they arose.
39.New subsection (1) provides that this section will apply where there are amounts in a company’s losses pool at the beginning of an accounting period. In addition, the company must have made a scheme profit in relation to the same risk transfer scheme and, ignoring profits and losses made by the group not as a result of the scheme, then the relevant group makes a pre-tax economic profit in the relevant period as a result of fluctuations in the relevant rate, index or value that pertains to the scheme.
40.New subsection (2) sets out the amount of the losses pool at the beginning of the period that is now brought into account as though it arose from a loan relationship. This is the amount of the losses pool, up to a maximum of the relevant scheme profits made in the period, in proportion to the amount of the relevant scheme profits in that period that arose from loan relationships.
41.New subsection (3) sets out the amount of the losses pool at the beginning of the period that is now brought into account as though it arose from a derivative contract. This is the amount of the losses pool, up to a maximum of the relevant scheme profits made in the period, in proportion to the amount of the relevant scheme profits that arose from derivative contracts.
42.New subsection (4) clarifies that references to bringing a ring-fenced loss into account is to bringing it into account for the purposes of determining debits and credits under the rules relating to loan relationships or derivative contracts (Part 5 and Part 7 of CTA 2009 respectively).
43.New section 937I deals with calculating the amounts of a company’s losses pool and profits pool.
44.New subsection (1) provides that a company’s losses pool for a risk transfer scheme, at the beginning of an accounting period, is the total of the amount of the loss pool at the beginning of the previous accounting period plus the scheme loss made in the previous accounting period that was not brought into account in that period. From this any scheme losses that were brought into account as a result of the rules relating to offsetting losses in later periods would be deducted. Where a risk transfer scheme starts in the current accounting period, it is assumed that the loss pool at the start of the period is nil.
45.New subsection (2) provides that a company’s profits pool for a risk transfer scheme, at the beginning of an accounting period, is the total of the amount of the profits pool at the beginning of the previous accounting period plus the scheme profits made by the company in the previous accounting period that were not offset by a scheme loss in that previous period. From this any scheme losses that were brought into account in the previous accounting period as a result of the rules relating to offsetting loss in the period in which they arose would be deducted. Where a risk transfer scheme starts in the current accounting period, it is assumed that the profits pool at the start of the period is nil.
46.New section 937J sets out the tax capacity assumption.
47.New subsection (1) sets out that the tax capacity assumption applies for the purposes of determining whether condition 2 in new section 937C is met.
48.New subsection (2) sets out that the tax capacity assumption is that economic profits and losses must be calculated, when there is a scheme loss, on the basis that the company obtained the “full tax benefit” of the loss. The concept of the “full tax benefit” is defined at new subsection (3).
49.New subsection (3) defines the “full tax benefit” as being the reduction in corporation tax liability that would result if the scheme loss is fully deductible from an equivalent amount of taxable profits.
50.New subsection (4) clarifies that references to bringing a loss into account is to bringing it into account for the purposes of determining debits and credits under the rules relating to loan relationships or derivative contracts (Part 5 and Part 7 of CTA 2009 respectively).
51.New section 937K provides the meaning of “associated with”.
52.New subsection (1) sets out that in order for two companies (“company A” and “company B”) to be associated at any time then any of five conditions (set out at new subsections (2) to (6)) need to be met.
53.New subsection (2) is the first condition. This is that the financial results of company A and company B meet the “consolidation condition”. The “consolidation condition” is defined in new subsection (7).
54.New subsection (3) is the second condition. This is that company A and company B are connected for the accounting period of A in which the relevant time falls. As per new subsection (8), the definition of connection used for the purposes of loan relationships at sections 466 to 471 of CTA 2009 will apply.
55.New subsection (4) is the third condition. This is that company A has a major interest in company B, or vice-versa. As per new subsection (8), the definition of “major interest” used for the purposes of loan relationships at sections 473 and 474 of CTA 2009 will apply.
56.New subsection (5) is the fourth condition. This is that company A and a third company meet the “consolidation condition” and that the third company has a major interest in company B.
57.New subsection (6) is the fifth condition. This is that company A and a third company are connected (as per new subsection (8)) and that third company has a major interest in company B.
58.New subsection (7) sets out the “consolidation condition”. This is that the financial results of any two companies are required to be consolidated into account prepared under section 399 of the Companies Act 2006 or, if that are not to be consolidated into such accounts, then this is due to the exemption at section 399(3) of the Companies Act 2006.
59.New subsection (8) imports the definitions of “connection” and “major interest” from the loan relationships legislation at sections 466 to 471 and sections 473 and 474 of CTA 2009 (respectively) into new section 937K.
60.New section 937L provides interpretation of the references in the risk transfer rules to “economic” losses and profits.
61.New subsection (1) sets out that any reference to an “economic” profit or loss includes profits and losses that are unrealised as well as realised profits and losses.
62.New subsection (2) sets out that the economic profit or loss made by a relevant group is made by the members of the relevant group, when considered together.
63.New subsection (3) deals with situations where any member of the group makes a scheme loss or profit in an accounting period that, under generally accepted accounting practice, is calculated by reference to fluctuations in the relevant rate, index or value over a longer period. In any such case the economic profit or loss of the group insofar as it relates to that scheme loss or profit is to be computed over that longer period.
64.New subsection (4) sets out that when calculating an economic profit or loss made by a group of companies that do not have coterminous accounting periods then the amounts are still to be calculated over the accounting period of the company whose scheme profit or loss is being considered. This is subject to the rule at new subsection (3) regarding scheme profits or losses computed over longer periods. However, amounts are only to be taken into account to the extent that they relate to the times when the relevant company is party to the risk transfer scheme.
65.New subsection (5) clarifies that a “pre-tax” economic loss or profit refers to the economic profit without any regard to any profit or loss made as a result of the Corporation Tax Acts.
66.New section 937M deals with foreign currency accounting.
67.New subsection (1) clarifies that, when calculating amounts for the purposes of the risk transfer scheme provisions in relation to a particular company, then economic profits and losses are to be calculated in the “tax calculation currency” of that company in that accounting period.
68.New subsection (2) defines “tax calculation currency” for the purposes of new subsection (1) as having the same meaning as that in section 17(5) of CTA 2010.
69.New section 937N provides a definition of “scheme” for the purposes of the risk transfer scheme provisions.
70.New section 937O provides for a regulation-making power in connection with the application of the risk transfer scheme provisions to dealers in securities.
71.New subsection (1) provides the Treasury with the power to amend, by way of order, the rules in the risk transfer scheme provisions such that they can apply to losses and profits made in a trade. As per section 1171 of CTA 2010, such an order would be exercisable by way of statutory instrument and subject to negative procedure.
72.New subsection (2) limits the regulation-making power in new subsection (1) to losses and profits made by a company that carries on a banking business, an insurance business, or a business consisting wholly or partly of dealing in securities.
73.New subsection (3) defines “securities” for the purposes of new subsection (2).
74.New subsection (4) clarifies that any order made under the power in new subsection (1) may make different provisions for different cases or purposes and that incidental, consequential, supplementary or transitional provision may be included.
75.Paragraph 4 of the Schedule contains an index of defined expressions.
76.Paragraph 5 provides for commencement and transitional rules.
77.Sub-paragraph (1) sets out that the commencement date for the risk transfer scheme provisions is 1 April 2010.
78.Sub-paragraph (2) sets out that an accounting period is to be treated as split where it begins before the commencement date and ends on or after the commencement date.
79.Sub-paragraph (3) sets out that where an accounting period is to be treated as split (as per sub-paragraph (2)) then that part of the accounting period that falls before the commencement date and that part of the accounting period that falls on or after the commencement date are to be treated as though they are separate accounting periods.
80.Sub-paragraph (4) sets out that in relation to the first accounting period to which the risk transfer scheme provisions apply then rules relating to the calculation of a company’s losses pool or profits pool at the start of an accounting period (new section 937I) will not apply. Similarly, at the beginning of the period, the company’s losses pool and profits pool are to be nil.
Background Note
81.Overhedging and underhedging arrangements (“risk transfer schemes”) primarily seek to exploit the tax provisions in order to achieve better returns or lower borrowing costs available where there is an exposure to a risk, such as foreign exchange, while effectively passing that exposure on to the Exchequer.
82.This is achieved by fragmenting transactions amongst different group companies to ensure that an individual company can get tax relief for a larger loss than the economic loss to the group as a whole. It is structured to ensure that the tax relief on the loss at entity-level fully offsets the economic loss to the group as a whole.
83.The purpose of these provisions is to ensure that any losses from risk transfer scheme arrangements are ring-fenced such that they can only be relieved against profits from the same risk transfer scheme. This will prevent such losses from reducing the group’s tax liabilities except to the extent that the same scheme has generated previous taxable profits.
84.The rules will apply to instruments that are treated, for tax purposes, as loan relationships or derivative contacts. There is also a regulation-making power to extend these provisions, if considered necessary, to include trading profits and losses made by certain types of business within the financial sector.
