FA 2011 Sch 4 has tightened the existing anti-avoidance measures contained in CTA 2009 ss 311–312 and ss 599A–599B and has introduced new anti-avoidance provisions (CTA 2009 ss 455A and 698A). These sections are designed to counter arrangements that seek to exploit the accounting derecognition rules in order to obtain a tax advantage from the derecognition in whole or in part of a creditor relationship or derivative contract.
The tightening of existing anti-avoidance
The tightening of existing anti-avoidanceFA 2011 Sch 4 has made amendments to CTA 2009 ss 311–312 (loan relationships) and 599A–599B (derivative contracts).
For times on or after 6 December 2010 these sections apply where a creditor relationship or derivative contract is wholly or partially derecognised in a company’s accounts in accordance with generally accepted accounting practice as a result of tax avoidance arrangements to which the company is at any time a party.
Where these sections apply a company is required to recognise for tax purposes the full credits arising on the creditor relationship or derivative contract in question.
‘Arrangements’ are defined as including any arrangements, scheme or understanding of any kind, whether or not legally enforceable, involving a single transaction or two or more transactions.
Arrangements will constitute tax avoidance arrangements if the main purpose, or one of the main purposes, of any party to the arrangements, in entering into them, is to obtain a tax advantage (within the meaning of CTA 2010 s 1139).
A company is treated as being a party to a creditor relationship or a derivative contract even if it has disposed of its rights under the creditor relationship or derivative contract to another person under a repo or stock lending arrangement, or under a transaction which is treated as not involving any disposal as a result of TCGA 1992 s 26 (mortgages and charges not to be treated as disposals).
In the case of a creditor relationship where a company becomes a party to the tax avoidance arrangements on or after 23 March 2011, it is not permitted to obtain relief for any debits arising in respect of the creditor relationship.
In the case of a debtor relationship, as before, where a company is or is treated as being a party to the debtor relationship as part of the arrangements and the debtor relationship is wholly or partially derecognised in its accounts, the company is required to bring into account the full debits or credits arising on the debtor relationship for tax purposes, subject to the limitation that the debits that are brought into account in respect of the debtor relationship under CTA 2009 s 312 may not exceed the credits that are brought into account under this section in respect of the creditor relationship.
As before, where a creditor or debtor relationship is partially derecognised in a company’s accounts the basis of accounting used in the company’s accounts has to be used to determine the debits and credits to be brought into account. In other cases an amortised cost basis has to be used.
In the case of CTA 2009 ss 599A–599B there are two significant changes to the way in which they apply. In each case the change applies where a company becomes a party to the tax avoidance arrangements on or after 23 March 2011.
The first change is that where, at the start of an accounting period to which s 599A applies, the carrying value of the derivative contract in the company's accounts is less than its fair value, the company is required to bring a credit into account in that accounting period equal to the difference.
The second change is that a company is prevented from obtaining relief for any debits arising in respect of the derivative contract in an accounting period. It is understood that HMRC will interpret the reference to ‘debits’ as only covering net debits; that is, a company will only be prevented from obtaining relief for any loss arising in respect of the derivative contract, rather than for any debits arising in respect of the derivative contract in the accounting period in question.
This is significant as, typically, under a derivative contract payments can flow both ways. As before, where CTA 2009 s 599A applies a fair value basis has to be used to determine the profits that are to be brought into account in respect of the derivative contract for tax purposes.
FA 2011 Sch 4 has also introduced new CTA 2009 ss 455A (loan relationships) and 698A (derivative contracts), which apply for times on or after 6 December 2010.
These sections apply to deny relief for a debit where a creditor relationship and a derivative contract respectively are derecognised in a company's accounts in accordance with tax avoidance arrangements (the definition is the same as above) to which the company is at any time a party and the company continues to be a party to the loan relationship or derivative contract in question.
As above, a company is treated as continuing to be a party to a creditor relationship or derivative contract where it has disposed of the creditor relationship or derivative contract under a repo or stock lending transaction or a transaction which is not treated as involving any disposal by virtue of TCGA 1992 s 26.
John Lindsay, Consultant, Linklaters LLP
