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HMRC internal manual

Corporate Finance Manual

From
HM Revenue & Customs
Updated
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Loan relationships: tax avoidance: index-linked gilt-edged securities: economic profits and losses

Pre-tax economic profit or loss

In ascertaining whether an index-linked capital return is ‘hedged’ within the meaning of CTA09/S400A(8), the test is whether the ‘pre-tax economic profit or loss’ of the relevant group or company is unaffected by that return.

The question is whether or not the relevant group or company retains any economic benefit from being party to the index-linked capital return that arises from being party to the index-linked gilt. Clearly, this is not the case where the index-linked capital return is being paid away under some other transaction. For example, where a company holds index-linked gilts and is also party to a total-return swap of the type mentioned in example 2 at CFM39150, it is clear that the company will not retain any of the index-linked capital return arising from holding the index-linked gilt. Consequently, the company’s pre-tax economic profit or loss is unaffected by that return.

Unrealised gains and losses

CTA09/S400B contains a further provision relating to the ‘pre-tax economic profit or loss’. This clarifies that the profit or loss referred to is one that includes both unrealised as well as realised profits or losses (CTA09/S400B(1)).

Group arrangements

Where more than one company is party to the arrangements, the economic profit or loss is the aggregate position of all of the members party to the arrangement (CTA09/S400B(2)).

Pre-tax

In order that the economic profit or loss that is calculated is ‘pre-tax’, CTA09/S400B(4) clarifies that the economic profit or loss is determined without reference to any gain or loss that arises as a result of the operation of the Corporation Tax Acts (defined at ICTA88/S831(1)(a)).