CFM76080 - Other tax rules on corporate finance: change of accounting basis: the COAP Regs: ‘prescribed’ debits and credits
SI 2004/3271: regulation 4
Regulation 4 sets out the debit and credit amounts to which the COAP Regulations apply. The prescribed amounts are not immediately brought into account for tax purposes, instead they are either:
- Deferred and brought into account over a period of time (see CFM76090)
- Excluded from being brought into account (see CFM76100)
‘Prescribed’ debits and credits
Prescribed debits and credits are those arising from a change in accounting policy:
- under the ‘normal’ change of basis rules under CTA09/S308 or S597 (this is likely to be rare following the legislative changes to the loan relationship and derivative contract rules in 2016 to follow amounts recognised in profit or loss); or
- under the change of accounting basis rules under CTA/S316, S318, S614 or S615 where there is a difference between the tax-adjusted carrying value at the end of the last period of the old accounting policy, and the tax-adjusted carrying value at the start of the first period of the new accounting policy.
However, this excludes amounts set out in regulation 4(3) and 4(4).
Regulation 4(3): Loan relationships
Regulation 4(3) covers loan relationship debits or credits which arise under the COAP Regulations in the same period as that in which the asset or liability falls to be fully discharged. This is the latest date, under the terms of the instrument, on which it falls to be fully repaid or redeemed. Regulation 4(3) does not apply just because the loan is repaid early.
However, this exclusion does not apply to transitional adjustments arising from the adoption of IFRS 9 in respect of impairment losses (see below).
Regulation 4(4): Derivative contracts
Debits and credits arising on derivative contracts to which the company is party in one of two circumstances:
- Regulation 4(4)(a) - where the company is treated as a party to the contract by CTA09/S585(2) and the corresponding loan relationship is one to which regulation 4(3) applies.
This ensures that where a loan relationship with an embedded derivative is ‘bifurcated’, and for tax purposes is treated as a loan relationship and a derivative contract (see CFM37610), the derivative component is treated in the same way as the loan relationship. If the security as a whole matures within the same accounting period, and a transitional debit or credit on the loan relationship is wholly brought into account in the period, the same treatment will apply to the derivative.
- Regulation 4(4)(b) - debits and credits arising on derivative contracts not covered by the Disregard Regulations but which hedge loan relationships to which regulation 4(3) applies.This regulation ensures parity of treatment between a loan relationship that matures within the period, and any derivative that hedges it. See CFM57000 for more on the Disregard Regulations.
IFRS9: Impairment losses
The exclusions under regulations 4(3) and 4(4) do not apply to impairment losses arising from the adoption of IFRS 9. This includes cases where under either FRS101 or FRS102 the requirements of IFRS9 are adopted.