S316 (lending relationships) and S614 (derivative contracts) are the main provisions for taking into account transitional adjustments for corporation tax purposes. These are far-reaching provisions that seek to take into account the difference between the tax-adjusted book value of an asset or liability at the end of a period and the tax-adjusted book value at the beginning of the period. which immediately follows.
This difference is generally accounted for in the subsequent period in the same way as a debit or credit amount is accounted for under generally accepted accounting practice. In cases where the adjustment results from a change in the company’s accounting policy, the COAP regulation may provide for a different treatment (for example for the amount to be distributed).
The COAP regulations were introduced in 2004 and prescribe how amounts resulting from a change in accounting method are to be taken into account for corporation tax. In most cases, they seek to spread the amounts over ten years, although some amounts may not be taken into account at all or on a different basis. So while the legislation in CTA09 quantifies the amount of the adjustment, it is the COAP regulations that determine when, if at all, it is taxed or exempt. (See CFM76070)
A company prepares accounts for the EPA as at 31 December 2016 which show a loan with a book value of £100. The company is adopting a new accounting policy in its accounts for APE as of 31 December 2017 and restating the comparatives to 31 December 2016 so that the loan asset now has a closing book value of £150. The opening book value of the asset on 1 January 2017 will also be £150. The book value in this case needs no adjustment to arrive at the tax-adjusted book value.
S316 will apply to bring the difference between the tax adjusted book value of the loan asset at the end of the prior period (£100) and the value at the start of the subsequent period (£150). A credit amount of £50 will therefore be taken into account, although it may be staggered or even deferred under the COAP regulations.
Previous approach (before 2016)
For accounting periods beginning before January 1, 2016, the tax treatment would depend on whether or not a prior period adjustment was recognized in the accounts in accordance with generally accepted accounting practices. If a prior period adjustment were recognized, CTA09/S308 (loan relationships) and CTA09/597 (derivative contracts) would take this amount into account, regardless of where it was recognized in the accounts.
Where the accounts did not show a prior period adjustment (eg where the company first adopted IFRS, FRS 101 or FRS 102), then S308 and S597 could not take an amount into account. Instead, S315-S319 (loan relationships) and S613-S615 (derivative contracts) would commit to reflect the transitional adjustment.
Prior to 2016, S316 and S613 were limited to changes in accounting policy. They did not apply when a change in the basis of accounting was required following the application of a tax law. In particular, CTA09/S350 and S351 applied when a lending relationship became or ceased to be a related business relationship under CTA09/S349. (See CFM35180)
- Meaning of tax-adjusted book value (CFM76040)