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HMRC internal manual

Corporate Finance Manual

Derivative contracts: tax avoidance: amounts not fully recognised for accounting purposes: periods beginning on or after 6 December 2010

For periods beginning before 6 December 2010, the rule in CTA09/S599A and S599B applies where specific conditions are met (CFM56112).

Periods beginning on or after 6 December 2010

For period beginning on or after 6 December 2010, the derecognition anti-avoidance legislation operates as a general rule, wherever an amount is not fully recognised, as a result of the company being party to tax avoidance arrangements.

This change to the legislation was made by FA11/S28 and FA11/SCH4. See CFM56118 for more on commencement provisions.

The changes made with effect from that date are as follows:

  • Conditions A to C are repealed.
  • Instead, S599A and S599B apply wherever a company is party to a derivative contract, and as a consequence of its being party to tax avoidance arrangements amounts are not fully recognised in respect of the creditor relationship.
  • Where S599A applies, S599B requires amounts to be brought into account for tax purposes as if the derivative contract had been fully recognised in the accounts, but these amounts do not include debits (CTA09/S599B(2A)). ‘Debit’ here refers to the net debit that arises in an accounting period.
  • A new section CTA09/S698A is inserted, to deny a debit arising from the derecognition of a derivative contract (CFM56116).
  • S599B(4) includes a requirement that where the fair value of a derivative exceeds the accounts carrying value at the start of the accounting period in which avoidance arrangements are entered into, the difference is to be brought into account as a credit in that period. It is aimed at schemes in which it may be argued that fair value profits of an earlier period where an in-the-money, off-balance sheet derivative, is transferred as part of avoidance arrangements, without recognition of an accounting profit, in a later period.

For periods beginning on or after 6 December 2010, S599A and S599B will apply to a wider range of avoidance schemes based on derecognition than those previously addressed by conditions A to C, and will come into play where the company is party to ‘tax avoidance arrangements’.

These are arrangements to which a company is party if the main purpose, or one of the main purposes of entering them is to obtain a ‘tax advantage’.

‘Tax advantage’ takes its meaning from CTA10/S1139, and ‘arrangements’ includes arrangements, schemes and understandings of any kind.

These anti-avoidance provisions operate in the same way as the equivalent rules for loan relationships. See CFM39220 for more guidance on the application of this rule to a company that is an innocent counterparty to another company with an avoidance purpose.