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HMRC internal manual

Corporate Finance Manual

Other tax rules on corporate finance: change of accounting policy: meaning of ‘carrying value’

Carrying value

CTA09/S317 for loan relationships and CTA09/S702 for derivative contracts include in the ‘carrying value’ amounts that might be shown separately in the accounts, such as accrued interest and provisions for impairment losses, and also ensure that any adjustments made under a number of specific provisions in the loan relationships and derivative contracts rules are taken into account in arriving at the carrying value for tax purposes.

These tax adjustment provisions for loan relationships are:

  • the group continuity rules (S340 and S341, CFM34000)
  • the connected party rules (the use of the amortised cost basis and certain debits or credits excluded or deemed to arise - S349, S354, S360, S361 - S363, CFM35000)
  • the connected party late interest rules (CTA09/PT5/CH8, CFM35800)
  • the special rules that apply to certain types of security (gilts, FOTRA securities, deeply discounted securities, loan relationships with embedded derivatives, CFM37600, and reset bonds, CFM39040)
  • amounts not fully brought into account for periods of account beginning on or after 22 April 2009 (CFM33120).
  • the Regulatory Capital Securities Regulations (SI 2013/3209).

For derivative contracts the tax adjustment provisions are:

  • embedded derivatives in loan relationships (CTA09/S584 - S586, CFM52500)
  • amounts not fully recognised for accounting purposes (CTA09/S599A - 599B, CFM56110), applying from 22 April 2009
  • the group continuity rules (CTA09/PT7/CH5, CFM53000)
  • Regulations 7, 8 and 9 of the Disregard Regulations in cases where an election under Regulation 6 of those regulations is made (Regulation 6(12A)(b), CFM57360).

Example of adjustment to carrying value

CFM35150 gives the example of a bank that issues bonds to a subsidiary, a connected party. Under CTA09/S349 the bank must use the amortised cost basis for tax purposes in accounting periods ending before the transition, and the amortised cost basis in periods after the transition. The ‘carrying value’ under CTA09/S316 is the amortised cost basis, not the fair value basis that may be used in the accounts.

Carrying value and bad debts disallowed

For loan relationships purposes only, a transitional rule in CTA09/SCH2/PARA62 (previously FA96/SCH9/PARA19A(4BA)) provides that in determining the carrying value, no account is taken of bad debts previously disallowed under FA96/SCH9/PARA5(1) for a loan relationship or CTA09/S55 (for a trade debt). The effect is to allow as a transitional debit the amount previously disallowed.