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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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FA2010: risk transfer schemes: utilising ring-fenced losses: subsequent periods

The rules for the treatment of ring-fenced scheme losses in accounting periods subsequent to that in which the loss arose are at CTA10/S937H.

The overall concept is that ring-fenced scheme losses can only be utilised to the extent that they can match relevant scheme profits from the same risk transfer scheme.

In order to determine the amount of any ring-fenced scheme losses that can be offset in accounting periods subsequent to that in which the loss arose, it is first of all necessary to determine the amount of the losses pool at the start of the accounting period (see CFM63390).

Ring-fenced scheme losses can only be brought into account if:

There are amounts in the losses pool at the start of the accounting period, and

The company has made a scheme profit in the accounting period (CFM63360), and

The group has made a pre-tax economic profit in the accounting period as a result of fluctuations in the relevant scheme rate, index or value.

Where a ring-fenced scheme loss is brought into account in a period subsequent to that in which it arose it is brought into account as though it is a loss of that period.

The amount brought into account is the lower of the amount in the losses pool (CFM63390) and the amount of the relevant scheme profit made in the period (CFM63360).

Bringing the amount into account - loan relationships and derivative contracts

The amount brought into account will be brought into account as a loss arising from a loan relationship to the extent that the relevant scheme profit against which the loss is offset arises from a loan relationship.

Similarly, the amount brought into account will be brought into account as a loss arising from a derivative contract to the extent that the relevant scheme profit against which the loss is offset arises from a derivative contract.

Example

Company X has a losses pool at the start of an accounting period of £500k. During the current year it makes relevant scheme profits of £400k; of which £100k relates to a loan relationship and £300k relates to a derivative contract.

The amount to be brought into account will be the lower of the losses pool at the start of the accounting period (£500k) and the relevant scheme profits in the current year (£400k). Therefore, £400k.

  • £100k of the loss will be brought into account as arising from a loan relationship, and
  • £300k of the loss will be brought into account as arising from a derivative contract.
  • The amounts will be brought into account as though they were losses made in the current period.
  • £100k of losses pool will remain to be offset in subsequent periods (CFM63390).