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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: ‘economic’ profits and losses

The concept of an ‘economic’ profit or loss is key to many of the provisions within the risk transfer scheme rules. For example, it appears in the definition of a risk transfer scheme in Condition 2 and is an element within calculating the relevant proportion of scheme profits and losses that make up the ring-fenced scheme loss and relevant scheme profits.

CTA10/S937L provides interpretation of references to economic profits and losses as follows:

Unrealised losses and profits

CTA10/S937L(1) clarifies that economic profits and losses refers to unrealised profits and losses as well as realised profits and losses.

Using CFM63320 as an example, this means that the profits and losses made on the yen shares constitute an economic profit or loss despite the fact that the profit or loss has not yet been realised (and won’t be realised until the shares are sold).

The group

CFM63440 contains details of the group for the purposes of the risk transfer scheme provisions. CTA10/S937L(2) confirms that an economic profit or loss is made ‘by the relevant group’ on the basis of combining the results from the members of the group.

Period over which economic profits or losses are calculated

Under some circumstances it is possible that the scheme profit or loss is calculated by reference to fluctuations in the scheme rate, index or value over a period longer than an accounting period. Accordingly, CTA10/S937L(3) confirms that any economic profits and losses are computed over that same period.

Similarly, CTA10/S937L(4) clarifies that economic profits and losses are only to be taken into account to the extent that they arise during times during which the relevant group is party to the risk transfer scheme.

‘Pre-tax’

Where there is any reference to a ‘pre-tax’ economic profit or loss (for example, in calculating the ‘relevant proportion’ for the ring-fenced scheme losses or relevant scheme profits), this should be to the economic profit or loss, ignoring any tax impact.

Using CFM63320 as an example and assuming that sterling has appreciated against yen, this would mean that the ‘pre-tax’ economic profit would be the £13.9m gain on the yen borrowing less the £10m loss on the shares - i.e. a profit of £3.9m.

Foreign currency accounting

CTA10/937M clarifies that when computing economic profits and losses, those profits and losses should be computed in the tax calculation currency of the company (as per CTA10/S17(5)) in which amounts potentially to be brought into account are being determined.