The Investment Trusts and Venture Capital Trusts (Definition of Capital Profits, Gains or Losses) Order 2006

Explanatory Note

(This note is not part of the Order)

Investment trusts and venture capital trusts are both within the ambit of the corporation tax provisions that apply to loan relationships (see Chapter 2 of Part 4 of the Finance Act 1996 (c. 8)), and to derivative contracts (see Schedule 26 to the Finance Act 2002 (c. 23)). Under those provisions, all profits, gains and losses, including those of a capital nature, are chargeable to corporation tax as income. If no further provision were to be made, therefore, the result would be that capital profits would fall within the charge to corporation tax, even though, before the enactment of those provisions, those profits were outside that charge.

In order to prevent this result, provision is made to exclude “capital profits, gains or losses” from being brought into account for the purposes of the corporation tax provisions applying to loan relationships and derivative contracts; and the expression “capital profits, gains or losses” has a different meaning according to whether the investment trust or venture capital trust prepares accounts in accordance with UK generally accepted accounting practice, or in accordance with international accounting standards. If accounts are prepared in accordance with international accounting standards, the expression “capital profits, gains or losses” has the meaning given by order made by the Treasury.

This Order accordingly defines the expression “capital profits, gains or losses” in the cases of investment trusts and venture capital trusts that prepare accounts in accordance with international accounting standards. The definition given is in accordance with the accounting treatment set out in the Statement of Recommended Practice relating to the Financial Statements of Investment Trust Companies, issued by the Association of Investment Trust Companies in January 2003 and revised in December 2005. This Statement of Recommended Practice may be found on the Association of Investment Trust Companies' web site at http://www.aitc.co.uk/files/technical/AITCRevised%20SORPDecember2005.pdf.

A full regulatory impact assessment has not been produced for this instrument as it has no impact on the costs of business, charities or voluntary bodies.