CFM16555 - Transition to IAS: artificial losses: forestalling provisions

Change of Accounting Practice: artificial losses

This guidance describes the treatment of loan relationships and derivative contracts in accounting periods beginning on or after 1 January 2005.

FA05/S82 contains forestalling provisions to prevent companies gaining a tax advantage by crystallising transitional adjustments under FA96/SCH9 paragraph 19A. Where an asset had a value under IAS that is less than its carrying cost under UK GAAP, a company might enter into a transaction to produce what would be a tax-deductible loss on the transition to IAS. ‘Entering into a transaction’ here includes a decision made by the company or its directors that affects the accounting treatment of an asset or liability, but does not include a decision to adopt IAS (FA05/S82 (6)).

Such differences are subject to deferral under Regulation 3 of the Change of Accounting Practice Regulations ( CFM16535) to the first accounting period beginning on or after 1 January 2006. A company entering into such a transaction in the period before it first uses IAS, typically the period ended 31 December 2004, would therefore gain at least a two-year tax advantage.

FA05/S82 defers tax relief for certain loan relationship debits where:

• on or after 14 December 2005 a company entered into a transaction involving loan relationships or derivative contracts that is not one entered into in the ordinary course of its business;
• as a result of that transaction it has a loss which would, but for FA05/S82, be recognised for tax in an accounting period beginning before 1 January 2005;
• the sole or main purpose of entering into the transaction was to create a tax debit;
• and if the company had continued to hold the relevant asset or liability and had not entered into the transaction, there would have been a debit that would have been deferred under Regulation 3 of the Change of Accounting Practice Regulations.

Where there conditions apply, instead of being brought into account for tax in the accounting period in which it arises, it is treated as one to which regulation 3 of the Change of Accounting Practice Regulations applies.

In deciding what the sole or main purpose is, account can be taken of anything done by connected companies (within the meaning of ICTA88/S839).

FA05/S82 (5) makes an exception for transactions taking place on or after 14 December 2004, where the transaction was entered into under a binding arrangement before that date.