Corporation Tax: update of the taxation of corporate debt and derivative contracts
Published 9 December 2015
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Who is likely to be affected
This measure affects companies subject to Corporation Tax (CT), which issue or hold debt or which are party to derivative contracts.
General description of the measure
This measure updates the rules governing the taxation of corporate debt (known as loan relationships) and derivative contracts. Changes are being made to address three situations where the interactions with accounting rules or other parts of the tax rules may lead to unintended and unfair outcomes. This is in the context of interest-free loans and other loans on non-market terms.
Policy objective
The measure updates the rules to take account of developments in accounting and in business practice since their original introduction in 1996. It supports the government’s policy of simplifying taxation by addressing potential anomalies in the application of the regime. It makes the rules more certain and easier to comply with and prevents unfair outcomes.
Background to the measure
At Budget 2013, the government announced consultation on a package of proposals to modernise the CT rules governing the taxation of corporate debt and derivative contracts.
A consultation document ‘Modernising the taxation of corporate debt and derivative contracts’ was published on 6 June 2013, and the government’s response was published on 10 December 2013.
A Technical Note, setting out the framework of the changes and the government’s priorities in the light of consultation, was published on 8 April 2014.
This measure supplements the main changes made as a result of the consultation, which are contained in Finance (No.2) Act 2015.
As a result of recent changes to UK accounting standards, companies can now be required to recognise interest-free loans and other non-market loans in their accounts at a value lower than the actual amount of the loan. This discount unwinds progressively in later periods’ accounts. This can create a notional interest cost in the accounts of the borrower which would typically be allowable for tax, but does not reflect any real interest paid.
Detailed proposal
Operative date
The changes made by this measure will have effect in respect of companies’ accounting periods commencing on or after 1 April 2016.
Where a company has an accounting period straddling 1 April 2016, a new accounting period will be deemed to commence on that date for this purpose only.
Current law
The current legislation is in Parts 5 and 7 of the Corporation Tax Act 2009, dealing with loan relationships and derivative contracts respectively. Part 6 deals with matters which, while not within the definition of loan relationships, are brought within the Part 5 rules.
The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) Regulations 2004 (SI 2004/3256) (known as the ‘Disregard Regulations’) provide detailed rules concerning the tax treatment of hedging relationships.
Proposed revisions
Legislation will be introduced in Finance Bill 2016 to address three issues.
First, a new section 446A will restrict deductions for notional finance costs which could otherwise give rise to asymmetrical tax treatment between the lender and the borrower. This section will apply where a loan liability is initially recognised in the borrowing company’s accounts at an amount less than the amount borrowed without the accounting discount arising on inception being taxed. It will apply in cases where the lender is an individual (or other non-corporate) or where there is a corporate lender which is resident in a non qualifying territory.
Second, sections 446 and 693 will be amended to ensure that companies are not taxed under the corporate debt or derivative contract rules on credits arising where debits, previously denied for tax under the transfer pricing rules, later reverse.
Third, sections 447, 448, 449, 451 and 694, concerned with exchange gains and losses, will be amended so they do not apply where one loan or derivative is matched with another, or is subject to matching under the Disregard Regulations. Loans and derivatives are matched when one is intended by the company to hedge foreign exchange risk on the other. This will ensure that the rules do not create a foreign exchange exposure in a company for tax where none exists commercially or in the accounts.
Summary of impacts
Exchequer impact (£m)
| 2015 to 2016 | 2016 to 2017 | 2017 to 2018 | 2018 to 2019 | 2019 to 2020 | 2020 to 2021 |
|---|---|---|---|---|---|
| - | Negligible | Negligible | Negligible | Negligible | Negligible |
This measure is expected to have a negligible impact on the Exchequer.
Economic impact
This measure is not expected to have any significant economic impacts.
Impact on individuals, households and families
No impact on individuals or households has been identified. The measure is concerned with corporate taxpayers only.
The measure is not expected to impact on family formation, stability or breakdown.
Equalities impacts
No impact on equalities has been identified.
Impact on business including civil society organisations
This measure is expected to have a negligible one off familiarisation impact on businesses overall. It will affect mainly large companies and that impact is expected to be negligible. The measure is expected to reduce ongoing costs due to simplification of the legislation.
Small and micro business assessment: the interaction of small companies with the loan relationships and derivative contracts regimes is generally straightforward, and no material impact on them is anticipated. No impact on civil society organisations is anticipated.
Operational impact (£m) (HM Revenue and Customs (HMRC) or other)
Revised legislation should be easier for HMRC to operate and reduce resource needed to combat attempted avoidance.
Other impacts
Other impacts have been considered and none have been identified.
Monitoring and evaluation
The measure will be continuously monitored by way of information collected from companies’ tax returns and regular contacts with businesses and other stakeholders.
Further advice
If you have any questions about this change, please contact Richard Daniel on Telephone: 03000 589408 or email: richard.daniel@hmrc.gsi.gov.uk.