Finance Act 2004

Part 2U.K.Derivative contracts

Method of taxationU.K.

47(1)In Schedule 26 to the Finance Act 2002 (c. 23) (derivative contracts: method of taxation), paragraph 15 (credits and debits to be brought into account) is amended as follows.U.K.

(2)In sub-paragraph (1) omit “in accordance with an authorised accounting method and”.

(3)Omit sub-paragraphs (2), (3) and (6).

(4)In sub-paragraph (9) for “paragraph 16” substitute “ the following provisions of this Schedule ”.

48(1)Paragraph 16 of that Schedule (exchange gains and losses arising from derivative contracts) is amended as follows.U.K.

(2)For sub-paragraph (3) substitute—

“(3)Sub-paragraph (1) does not apply to an exchange gain or loss of a company to the extent that it—

(a)arises in relation to a derivative contract whose underlying subject matter consists wholly or partly of currency, or

(b)results from the translation from one currency to another of the profit or loss of part of the company’s business,

and is recognised in the company’s statement of recognised gains and losses or statement of changes in equity.

(3A)Sub-paragraph (1) above does not apply to so much of an exchange gain or loss arising to a company, in relation to a derivative contract whose underlying subject matter consists wholly or partly of currency, as falls within a description prescribed for the purpose in regulations made by the Treasury.”.

(3)Omit sub-paragraphs (4) to (7).

(4)In sub-paragraph (8) after “(3)” insert “ or (3A) ”.

(5)In sub-paragraph (10) at the end add “ and power to make provision subject to an election or to other prescribed conditions ”.

Accounting methodsU.K.

49U.K.In the heading to Part 4 of that Schedule for “ACCOUNTING METHODS” substitute “ COMPUTATION OF AMOUNTS TO BE BROUGHT INTO ACCOUNT ”.

50U.K.For paragraphs 17 to 20 of that Schedule (authorised accounting methods and their application) substitute—

“Computation in accordance with generally accepted accounting practiceU.K.

17A(1)Subject to the provisions of this Schedule, the amounts to be brought into account by a company for any period for the purposes of this Schedule are those that, in accordance with generally accepted accounting practice, are recognised in determining the company’s profit or loss for the period.

(2)If a company does not draw up accounts in accordance with generally accepted accounting practice (“correct accounts”)—

(a)the provisions of this Schedule apply as if correct accounts had been drawn up, and

(b)the amounts referred to in this Schedule as being recognised for accounting purposes are those that would have been recognised if correct accounts had been drawn up.

(3)If a company draws up accounts that rely to any extent on amounts derived from an earlier period of account for which the company did not draw up correct accounts, the amounts referred to in this Schedule as being recognised for accounting purposes in the later period are those that would have been recognised if correct accounts had been drawn up for the earlier period.

(4)The provisions of sub-paragraphs (2) and (3) apply where the company does not draw up accounts at all as well as where it draws up accounts that are not correct.

Amounts recognised in determining company’s profit or lossU.K.

17B(1)Any reference in this Schedule to an amount being recognised in determining a company’s profit or loss for a period is to an amount being recognised for accounting purposes—

(a)in the company’s profit and loss account,

(b)in the company’s statement of recognised gains and losses or statement of changes in equity, or

(c)in any other statement of items brought into account in computing the company’s profits and losses for that period.

(2)Sub-paragraph (1) does not apply to an amount recognised for accounting purposes by way of correction of a fundamental error.

Power to make further provision by regulationsU.K.

17C(1)The Treasury may by regulations make provision—

(a)excluding amounts of a prescribed description from paragraph 17B(1);

(b)requiring amounts of a prescribed description that do not fall within paragraph 17B (1) (by virtue of regulations under paragraph (a) above or otherwise) to be brought into account in determining a company’s profit or loss for a period in prescribed circumstances;

(c)as to the manner in which any such amounts are to be brought into account.

(2)The regulations may (in particular) make provision by reference to the fact that amounts derive from or otherwise relate to amounts brought into account in a prescribed manner in a previous period of account.

(3)The power to make regulations under this paragraph includes—

(a)power to make different provision for different cases; and

(b)power to make provision subject to an election or to other prescribed conditions.

(4)Regulations under this paragraph may apply, exclude or modify any of the provisions of this Schedule in relation to cases for which provision is made by the regulations.”.

51U.K.In paragraph 21 (basis of accounting for contracts falling within paragraph 6, 7 or 8), for sub-paragraph (2) substitute—

“(2)Where this paragraph applies the debits and credits to be brought into account for the purposes of this Schedule as respects the derivative contract must be determined on the basis of fair value accounting.”.

Special provision for bad debt etc.U.K.

52U.K.In the heading to Part 5 of that Schedule (special provision for bad debt etc.) for “BAD DEBT ETC” substitute “ RELEASE OF LIABILITY ”.

53(1)Paragraph 22 of that Schedule (bad debts etc.) is amended as follows.U.K.

(2)For the heading substitute “ Release of liability under derivative contract ”.

(3)Omit sub-paragraphs (1) to (4).

(4)In sub-paragraph (5), omit paragraph (b) and the word “and” preceding it.

Special computational provisionsU.K.

54U.K.In paragraph 22A of that Schedule (deemed assignment of derivative contracts on company ceasing to be resident in UK etc.), omit sub-paragraph (5).

55U.K.In paragraph 23 of that Schedule (derivative contracts for unallowable purposes), in sub-paragraphs (2) and (3) omit “given by the authorised accounting method used”.

56(1)Paragraph 25 of that Schedule (debits and credits treated as relating to capital expenditure) is amended as follows.U.K.

(2)In sub-paragraph (1) omit “given by an authorised accounting method”.

(3)After sub-paragraph (3) add—

“(4)Where a debit is brought into account by a company in accordance with sub-paragraph (1), no debit shall be brought into account in respect of—

(a)the writing down of so much of the value of the fixed capital asset or project as is attributable to that debit, or

(b)so much of any amortisation or depreciation as represents a writing off of the interest component of the asset.”.

57U.K.In paragraph 30 of that Schedule (transactions within groups: authorised mark to market basis of accounting)—

(a)in the heading for “authorised mark to market basis of accounting” substitute “ fair value accounting ”;

(b)in sub-paragraph (1) for “an authorised mark to market basis of accounting” substitute “ fair value accounting ”.

58U.K.In paragraph 31A of that Schedule (amounts imputed under Schedule 28AA to the Taxes Act 1988), in sub-paragraph (2) omit “, notwithstanding the provisions of any authorised accounting method,”.

Collective investment schemesU.K.

59(1)Paragraph 32 of that Schedule (authorised unit trusts: capital profits, gains or losses) is amended as follows.U.K.

(2)In sub-paragraph (1) omit “, notwithstanding paragraph 15”.

(3)After that sub-paragraph insert—

“(1A)For the purposes of this paragraph “capital profits, gains or losses”—

(a)in the case of an authorised unit trust that prepares accounts in accordance with UK generally accepted accounting practice, has the meaning given by sub-paragraphs (2) to (4), and

(b)in the case of an authorised unit trust that prepares accounts in accordance with international accounting standards, has the meaning given by order made by the Treasury.”.

(4)In sub-paragraph (2) for the words “For the purposes of this paragraph” substitute “ In the cases mentioned in sub-paragraph (1A)(a) ”.

60(1)Paragraph 33 of that Schedule (open-ended investment companies: capital profits, gains or losses) is amended as follows.U.K.

(2)In sub-paragraph (1) omit “, notwithstanding paragraph 15”.

(3)After that sub-paragraph insert—

“(1A)For the purposes of this paragraph “capital profits, gains or losses”—

(a)in the case of an open-ended investment company that prepares accounts in accordance with UK generally accepted accounting practice, has the meaning given by sub-paragraphs (2) to (4), and

(b)in the case of an open-ended investment company that prepares accounts in accordance with international accounting standards, has the meaning given by order made by the Treasury.”.

(4)In sub-paragraph (2) for the words “For the purposes of this paragraph” substitute “ In the cases mentioned in sub-paragraph (1A)(a) ”.

61U.K.In paragraph 34 of that Schedule (power to amend paragraphs 32 and 33), in sub-paragraph (1) after “the definition of capital profits, gains or losses” insert “ in paragraph 32(2) to (4) or 33(2) to (4) ”.

62U.K.In paragraph 36 of that Schedule (contracts relating to holdings in unit trusts, open-ended investment companies and offshore funds) for sub-paragraph (2) substitute—

“(2)The Corporation Tax Acts have effect for that period (and any succeeding period in which the relevant contract is a relevant contract of the company) as if the relevant contract were a derivative contract.

(2A)The debits and credits to be brought into account for the purposes of this Schedule as respects the company’s relevant holdings must be determined on the basis of fair value accounting.”.

63U.K.For paragraph 38 of that Schedule (investment trusts and venture capital trusts: capital reserves) substitute—

“Investment trusts: capital profits, gains or lossesU.K.

38(1)Capital profits, gains or losses arising to an investment trust from a creditor relationship must not be brought into account as credits or debits for the purposes of this Schedule.

(2)For the purposes of this paragraph “capital profits, gains or losses”—

(a)in the case of an investment trust that prepares accounts in accordance with UK generally accepted accounting practice, has the meaning given by sub-paragraphs (3) and (4), and

(b)in the case of an investment trust that prepares accounts in accordance with international accounting standards, has the meaning given by order made by the Treasury.

(3)In the cases mentioned in sub-paragraph (2)(a) capital profits, gains or losses arising from a creditor relationship in an accounting period are profits, gains or losses that are carried to or sustained by a capital reserve in accordance with the Statement of Recommended Practice.

(4)For the purposes of this paragraph the Statement of Recommended Practice is, for an accounting period for which it is required or permitted to be used—

(a)the Statement of Recommended Practice relating to Investment Trust Companies, issued by the Association of Investment Trust Companies in January 2003, as from time to time modified, amended or revised, or

(b)any subsequent Statement of Recommended Practice relating to investment trusts, as from time to time modified, amended or revised.

Venture capital trusts: capital profits, gains or lossesU.K.

38A(1)Capital profits, gains or losses arising to a venture capital trust from a creditor relationship must not be brought into account as credits or debits for the purposes of this Schedule.

(2)For the purposes of this paragraph “capital profits, gains or losses”—

(a)in the case of a venture capital trust that prepares accounts in accordance with UK generally accepted accounting practice, has the meaning given by sub-paragraphs (3) and (4), and

(b)in the case of a venture capital trust that prepares accounts in accordance with international accounting standards, has the meaning given by order made by the Treasury.

(3)In the cases mentioned in sub-paragraph (2)(a) capital profits, gains or losses arising from a creditor relationship in an accounting period are profits, gains or losses that—

(a)are carried to or sustained by a capital reserve in accordance with the Statement of Recommended Practice as if the venture capital trust were an investment trust, or

(b)would be so carried to or sustained by a capital reserve if the venture capital trust were an investment trust and were using the Statement of Recommended Practice.

(4)For the purposes of this paragraph the Statement of Recommended Practice is, in relation to an accounting period for which it is required or permitted to be used—

(a)the Statement of Recommended Practice relating to Investment Trust Companies, issued by the Association of Investment Trust Companies in January 2003, as from time to time modified, amended or revised, or

(b)any subsequent Statement of Recommended Practice relating to investment trusts, as from time to time modified, amended or revised.”.

MiscellaneousU.K.

64U.K.In paragraph 48 of that Schedule (election to treat contract as two assets), for sub-paragraph (4) substitute—

“(4)The debits and credits to be brought into account for the purposes of Chapter 2 of Part 4 of the Finance Act 1996 as respects a creditor relationship arising under sub-paragraph (2)(a) must be determined on the basis of fair value accounting.”.

65U.K.In paragraph 49(4) of that Schedule (partnerships involving companies: provisions for determining credits and debits for company partner), for paragraph (c) substitute—

“(c)to the extent that any exchange gains or losses arising from the contract are recognised in the firm’s statement of recognised gains and losses or statement of changes in equity, the exchange gains or losses shall to that extent be treated as if they had been recognised in the corresponding statement of the company partner,”.

66U.K.For paragraph 50 of that Schedule (partnerships involving companies: application of accounting methods) substitute—

“Partnerships involving companies: use of fair value accountingU.K.

50(1)Where the company partner uses fair value accounting in relation to its interest in the firm, the debits and credits to be brought into account under paragraph 49 by that company must be determined on the basis of fair value accounting.

(2)In this paragraph “company partner” and “firm” have the same meaning as in paragraph 49.”.

67U.K.After that paragraph insert—

“Adjustment on company changing to international accounting standardsU.K.

50A(1)This paragraph applies where a company—

(a)prepares accounts for one period (“the earlier period”) in accordance with UK generally accepted accounting practice, and

(b)prepares accounts for the next period (“the later period”) in accordance with international accounting standards,

and the approach in each of those periods accords with the law and practice applicable in relation to that period.

(2)If there is a difference between—

(a)the accounting value of a derivative contract of the company at the end of the earlier period, and

(b)the accounting value of that contract at the beginning of the later period,

a corresponding debit or credit (as the case may be) shall be brought into account for the purposes of this Schedule in the later period.

(3)In sub-paragraph (2) “accounting value” means the carrying value of the contract recognised for accounting purposes.

(4)Where or to the extent that an adjustment is made under this paragraph, no adjustment under Schedule 22 (computation of profits: adjustment on change of basis) shall be made.”.

InterpretationU.K.

68U.K.Omit paragraph 52 of that Schedule (meaning of “statutory accounts”).

69U.K.In paragraph 54 (1) of that Schedule (interpretation)—

(a)omit the definition of “authorised accounting method”, “authorised accruals basis of accounting” and “authorised mark to market basis of accounting”;

(b)for the definition of “fair value” substitute—

““fair value”, in relation to a derivative contract of a company, means the amount which, at the time as at which the value falls to be determined, is the amount that the company would obtain from or, as the case may be, would have to pay to an independent person for—

(a)the transfer of all the company’s rights under the contract in respect of amounts which at that time are not yet due and payable, and

(b)the release of all the company’s liabilities under the contract in respect of amounts which at that time are not yet due and payable;

“fair value accounting” means a basis of accounting under which assets and liabilities are shown in the company’s balance sheet at their fair value;”; and

(c)omit the definition of “statutory accounts”.

Consequential amendmentU.K.

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