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Who is likely to be affected?
1. All companies within the scope of corporation tax. General description of the measure
2. The measure makes a number of changes to the loan relationships
and derivative contracts regimes introduced in Finance Act (FA) 2002
to ensure that the regimes operate as intended, to provide greater
certainty for business, and to remove opportunities for avoidance.
3. Two amendments to the loan relationships regime were announced
at the 2003 Pre-Budget Report:
- for companies in administration or liquidation, no tax charge
will arise on the release of debt between group companies
solely because of the appointment of an Administrator, Administrative
Receiver or Liquidator. The measure applies to any release
of intra-group
debt made on, or after, 10 December 2003; and
- the connected party rules deferring a deduction for interest and
discount accrued by a close company will not operate
solely because of the presence of a limited partnership Venture Capital
Fund, as
investor. The measure applies to accounting periods
ending on, or after, 10 December 2003.
Current law and proposed revisions
4. The existing rules for loan relationships in FA 1996 and derivative
contracts in FA 2002 will be amended as follows.
- To ensure the continuing application of recommended accounting practices
for open ended investment companies when calculating the capital
element of their profits or losses on derivative contracts. This measure
applies
to accounting periods beginning on or after 1 February 2004.
- To remove the requirement that both persons with a major interest
in a company had to make loans to the company before they were ‘connected’ for
the purposes of restricting deductions for late paid interest etc.
This measure applies for accounting periods beginning on or after
17 March
2004.
- To ensure that the provisions for restricting losses on derivative
contracts which have ‘unallowable purposes’ work in the
way originally intended. This measure applies for accounting periods
ending
on or after 17 March 2004.
- In response to artificial arrangements designed to avoid corporation
tax, to ensure the same tax treatment applies to profits or losses
accruing on loan relationships and derivative contracts irrespective
of the accounting
method used. This applies in two particular circumstances. The first
is when a company ceases to be UK resident (unless the asset, liability
or contract remains held at a UK permanent establishment of the migrating
company). The second is when a non-resident company ceases to hold
a loan relationship or derivative contract for the purposes of a UK
permanent
establishment, and the cessation is other than by disposal. This
measure applies to such cessations on or after 17 March 2004.
Further advice
5. If you have any questions about this change, please contact Susan
Wheatley on 020 7438 6684 regarding loan relationships or Sue Davies
on 020 7438 7010 regarding derivative contracts. www.inlandrevenue.gov.uk
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