CFM76040 – Corporate Finance Manual – HMRC Internal Manual

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CTA09/S465B and S702

In the event of a change in the basis of accounting for a loan relationship or a derivative contract, a transitional adjustment will have to be calculated for tax purposes (see CFM76020). This transitional adjustment arises in cases where there is a change in accounting method, as well as when there is a change in accounting basis required by law. This requires a comparison of the “tax-adjusted book value” (TACV) of the instrument before and after the change in accounting basis.

The starting point for the tax-adjusted book value is the book value of the loan or derivative recognized in the accounts.

The book value in the accounts will need to be adjusted in some cases to take into account situations where changes in this value have not yet been taxed or exempted, and where part of the book value will be taxed or exempted in the future.

Loan Relationship Adjustments

Tax adjustment provisions for loan relationships can be found in CTA09/PT5:

  • S308(1A) (amounts recognized in other comprehensive income and transferred to profit or loss),
  • S311 and S312 (amounts not fully recognized for accounting purposes), see CFM33120
  • S320A (amounts recognized in other comprehensive income and not transferred to profit or loss),
  • S323A (substantial modification: case where credits do not have to be taken into account),
  • S324 (restriction on debits resulting from revaluation), see CFM33210
  • S325 (restriction on credits resulting from reversal of unauthorized debits), see CFM33210
  • S333 and S334 (company ceasing to be UK resident and non-UK company ceasing to have a permanent establishment loan relationship in the UK), see CFM33300
  • CH4 (continuity of treatment on transfers within groups or organizations), see CFM34010
  • S349(2) (application of amortized cost accounting to related enterprise relationships), see CFM33130
  • S352 (disregarding related transactions), see CFM35340
  • S352A (loss reversal credit exclusion ignored),
  • S354 (exclusion of debits for impaired or released receivables of related undertakings), see CFM35320
  • S360 (exclusion of loans on reversal of impairment of debts of affiliated undertakings), see CFM35320
  • S361 – S363 (deemed debt forgiveness on impaired debt becoming held by a related company), see CFM35440
  • CH8 (related party relationships: default interest), see CFM35810
  • S382 (partner companies using fair value accounting), see CFM52730
  • S399 – S400C (handling of indexed golden securities), see CFM37130
  • S404 (restriction on deductions, etc. relating to FOTRA titles), see CFM37170
  • S406 – 412 (deeply discounted securities and private companies), see CFM37210
  • S415(2) (lending relationships with embedded derivatives), see CFM37660
  • CH13 (European Cross Border Business Transfer), see CFM34160
  • CH 14 (European cross-border mergers), see CFM34160

Adjustments to derivative contracts

For derivative contracts, the tax adjustment provisions are CTA09/PT7:

  • S584 (hybrid derivatives with incorporated derivatives), see CFM52500
  • S585 (lending relationships with embedded derivatives), see CFM52500
  • S586 (other contracts with embedded derivatives), see CFM52500
  • S597 (amounts recognized in profit determination), see CFM51040
  • S599A and S599B (amounts not fully recognized for accounting purposes), see CFM56110
  • S604A (amounts recognized in other comprehensive income and not transferred to profit or loss),
  • CH5 (transactions within groups), see CFM53010
  • CH9 (European Cross Border Business Transfer), see CFM53120
  • CH10 (European cross-border mergers), see CFM53120

Previous periods

For periods beginning before January 1, 2016, the legislation referred to “book value” which was defined by CTA09/S317 for loan relationships (now repealed) and CTA09/S702 for derivative contracts (now amended). However, in each case, the book value was adjusted for specific tax rules that affected how loan or derivative amounts were taken into account for tax purposes.

Book Value and Disallowed Bad Debts

For the purposes of loan relationships only, a transitional rule in CTA09/SCH2/PARA62 (formerly FA96/SCH9/PARA19A(4BA)) provides that when determining the book value, account shall not be taken of bad debts previously denied under FA96/SCH9/PARA5(1) for a loan relationship or CTA09/S55 (for a commercial debt). The effect is to authorize as a transitional debit the amount previously refused.

Additional tips

Additional information on the calculation of the TACV:

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