CFM51034 - Derivative contracts: the matters and computational rules: amounts to be brought into account

CTA09/S595-598,

This guidance relates to company periods of account beginning on or after 1 January 2016.

For earlier periods see CFM51040.

Amounts to be brought into account

Background

F(2)A15 made a significant change to which amounts recognised in a company’s accounts, in respect of the loan relationships matters, fall to be taken into account for tax, absent the application of special rules.

Before amendment, there was an expanded tax definition of an “amount taken into account in determining a company’s profit or loss” in S597(1), as it then stood. This was primarily based on the statement in the account to which a debit or credit was taken, including the company’s profit and loss account, income statement or statement of comprehensive income for that period, statement of total recognised gains and losses, statement of recognised income and expense, statement of changes in equity or statement of income and retained earnings for a period. Numerous, often complex, special tax rules then limited the effect of this expanded meaning of profit or loss.

This complexity to some extent reflected evolving account standards but by the time F(2)A15 was enacted the position had stabilised. IAS and FRS102 (the UK domestic accounting standards generally applicable to all companies except micro entities that adopt FRS105) had converged to an approach where the primary distinction was between amounts treated as an item of profit or loss and amounts treated as items of other comprehensive income (OCI). The third option was for an amount to be taken into account in determining the carrying value of an asset or liability, in this regard see S604 and CFM52040. The name given to a particular statement in a company’s accounts was of lesser importance.

The changes to the loan relationships legislation reflect the stabilisation of the accounting standards. It was then possible to make the primary determinant of whether an amount relating to one of the loan relationship matters was to be taken into account for tax whether it was treated as an item of profit or loss. Thus an amount taken directly to OCI would not be taxed unless a special rule intervened.

The current position is described below.

The amounts to be brought into amount are normally those recognised in profit or loss in GAAP-compliant accounts

S594A sets out the ‘matters’ in respect of which amounts are to be brought into account under the derivative contracts provisions - see CFM51032. S595 then deals with how the amounts to be brought into account in respect of a company period of account are to be determined. The general framework is that CTA09/PT7 is to operate by reference to the accounts of companies and amounts determined for accounting purposes - S595(1).

S595(2) sets out the general rule. This is that the amounts to be brought into account in any period in respect of the ‘matters’ are ‘those recognised on determining the company’s profit or loss for the period in accordance with generally accepted accounting practice’.

Generally accepted accounting practice (GAAP) is defined in CTA10/S1127 as UK GAAP. Where a company prepares IAS accounts, UK GAAP will mean GAAP in relation to IAS accounts. IAS accounts are accounts prepared in accordance with International Accounting Standards and a standard may be applied in its current form at any particular time, or as adopted by the EU. (More recent international standards are entitled, International Financial Reporting Standards or IFRS, but these fall within the ambit of the statutory definition of IAS).

Accounting standards may change with time and this may impact amounts taken into account for tax. From 1 January 2016, UK GAAP will normally mean IAS if applied in the financial statements, otherwise FRS102 or, in the case of micro entities, FRS105.

There is general guidance about the meaning of GAAP, in the context of the determination of trading profits, beginning at BIM31000 and in the context of financial instruments at CFM20000.

The meaning of “taken to profit or loss” is expanded in S597. It is an amount that is recognised in a company’s accounts for a period as an item of profit or loss. In particular it will not include an amount recognised as an item of other comprehensive income (OCI), but S597(IA) specifically includes an amount previously recognised in other comprehensive income, but transferred to profit or loss in a later period. This pattern is exactly the same as for loan relationships, see CFM33065.

Note that the amounts to be taken into account may arise from foreign exchange rate movements.

The F(2)A15 changes have continued the process of aligning the fundamental operation rules in the loan relationships and derivative contracts ever more closely with amounts recognised in GAAP-compliant amounts. Now the fundamental determinant of whether an amount in respect of a ‘matter’ is taxable of not is whether it is, under GAAP, treated as an item of profit or loss.

For the position where accounts are not GAAP-compliant, see CFM51080.

There are exceptions to this approach

S595 sets out the general rule that amounts may be brought into account on any basis that is in accordance with GAAP, but then sets out specific provisions that may override this. In particular, where “amounts are not fully recognised for accounting purposes”, an anti-avoidance rule in S599A may bring additional amounts into account. See CFM51DDD.

Regulatory Power {#}

S598 gives HMRC a power to make regulations about recognised amounts. In particular, such regulations may set out circumstances in which:

  • Amounts recognised as items of profits of loss in a company’s accounts are not to be brought into account under CTA09/PT7; or
  • Amounts not so recognised are to be brought into account.
  • The manner in which amounts are to be brought into account may be altered

The regulations may, but need not, be dependent on how amounts were treated in an earlier period. Different provisions may be made in different cases. Provision may be subject to election. Regulations may be effective from a date earlier than the date on which they are made, but may not have effect before the beginning of the calendar year in which they are made.

Regulations made under this provision or its predecessors (FA02/SCH4/PARA52(1), (2), SCH26/PARA17C(1) - (4) applicable to accounting periods beginning on or after 1 January 2016 include:

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TO FOLLOW

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(Position as at July 2018).

As regards earlier periods, see CFM51110.