Corporation Tax Act 2009

Unallowable purposes

690 Derivative contracts for unallowable purposes

(1) This section applies if in any accounting period a derivative contract of a company has an unallowable purpose.

(2) The company may not bring into account for that period for the purposes of this Part so much of any exchange credit in respect of that contract as is referable to the unallowable purpose on a just and reasonable apportionment.

(3) The company may not bring into account for that period for the purposes of this Part so much of any debit in respect of that contract as is referable to the unallowable purpose on a just and reasonable apportionment.

(4) Subsections (2) and (3) are subject to section 692 (allowance of accumulated net losses).

(5) An amount which would be brought into account in accordance with this Part as respects any matter apart from this section and section 692—

(a) is treated for the purposes of section 699(1) (priority of this Part for corporation tax purposes) as if it were so brought into account, and

(b) accordingly may not be brought into account for any other corporation tax purposes as respects that matter.

(6) For the purposes of this section and section 692, a credit is an exchange credit, in the case of any company, so far as it is attributable to any exchange gains arising to the company which are included in the reference to profits of the company in section 595(3) (see section 606 (exchange gains and losses from derivative contracts)).

(7) For the meaning of “has an unallowable purpose” and “the unallowable purpose” in this section and section 692, see section 691.

691 Meaning of “unallowable purpose”

(1) For the purposes of sections 690 and 692, a derivative contract of a company has an unallowable purpose in an accounting period if the purposes for which, at times during that period, the company—

(a) is a party to the contract, or

(b) enters into transactions which are related transactions by reference to it,

include a purpose (“the unallowable purpose”) which is not amongst the business or other commercial purposes of the company.

(2) If a company is not within the charge to corporation tax in respect of a part of its activities, for the purposes of this section the business and other commercial purposes of the company do not include the purposes of that part.

(3) Subsection (4) applies if a tax avoidance purpose is one of the purposes for which a company—

(a) is a party to a derivative contract at any time, or

(b) enters into a transaction which is a related transaction by reference to a derivative contract of the company.

(4) For the purpose of subsection (1), the tax avoidance purpose is only regarded as a business or other commercial purpose of the company if it is not—

(a) the main purpose for which the company is a party to the derivative contract or, as the case may be, enters into the related transaction, or

(b) one of the main purposes for which it is or does so.

(5) The references in subsections (3) and (4) to a tax avoidance purpose are references to any purpose which consists of securing a tax advantage for the company or any other person.

(6) In this section “tax advantage” has the meaning given by section 840ZA of ICTA (meaning of “tax advantage”).

692 Allowance of accumulated net losses

(1) This section applies if—

(a) in any accounting period a derivative contract of a company has an unallowable purpose, and

(b) there is a net loss in respect of that contract for that period.

(2) For the purposes of this section, there is such a net loss if—

(a) the sum of the debits in respect of that contract which are excluded from being brought into account for that period by section 690(3), exceeds

(b) the sum of the exchange credits in respect of that contract which are so excluded by section 690(2).

(3) The amount of that excess is the amount of the net loss in respect of the contract for the period.

(4) The amount of the excess accumulated net losses in respect of the contract for an accounting period is to be brought into account as a debit for that period.

(5) The amount of the excess accumulated net losses in respect of a contract for an accounting period is found as follows.

• Step 1

  Add together the amount of any net loss arising in respect of the contract for that accounting period and earlier accounting periods.

• Step 2

  Deduct from the result of Step 1 any amount which was brought into account in accordance with this section in any earlier accounting period.

• Step 3

  Add together the amount of any credits (other than exchange credits) arising in respect of the contract for that accounting period or any earlier accounting period.

• Step 4

  Deduct from the result of Step 3 (but not so as to reduce it below nil)—

  (a)

  so much of any debits arising in respect of the contract for that accounting period or any earlier accounting period as is not excluded from being brought into account by section 690(3), and

  (b)

  any amount which was brought into account in accordance with this section in any earlier accounting period.

• Step 5

  Compare the result of Step 2 and the result of Step 4.

  The amount of the excess accumulated net losses for the period is the lower of those results.