Made | 9th December 2004 | ||
Laid before the House of Commons | 10th December 2004 | ||
Coming into force | 1st January 2005 |
(2) In these Regulations -
(3) In these Regulations any reference to an asset which is a ship or aircraft includes a reference to a contract -
(4) In these Regulations -
(5) For the purposes of these Regulations, a company has a hedging relationship between a derivative contract or a liability representing a loan relationship on the one hand ("the hedging instrument") and an asset, liability, receipt or expense on the other ("the hedged item") if and to the extent that -
Exchange gains or losses arising from liabilities or assets hedging shares etc.
3.
- (1) For the purposes of section 84A(3A) of the Finance Act 1996 there is prescribed an exchange gain or loss arising to a company in an accounting period in relation to a liability representing a loan relationship of the company which is matched with the whole or part of any shares, ships or aircraft.
(2) This regulation does not apply if movements in the fair value of any shares, ships or aircraft which are an asset falling within regulation 3(1) are brought into account by the company in computing, for the purposes of corporation tax, the profits of a trade carried on by it which consists of or includes dealing in shares, ships or aircraft.
(3) Shares, ships or aircraft are matched with a liability if any of the following conditions are satisfied.
Condition 1
The condition is that for the accounting period of the company immediately preceding the first accounting period to which these Regulations apply -
Condition 2
The condition is that for the accounting period, the shares, ships or aircraft are a hedged item under a designated hedge of exchange rate risk in which the liability is the hedging instrument.
Condition 3
The condition is that the currency in which the liability is expressed is such that the company could, by entering into that liability, reasonably expect to eliminate or substantially reduce the economic risk of holding the asset, or part of the asset, which is attributable to fluctuations in exchange rates.
(4) If condition 3 applies, a liability is matched with an asset only to the extent that the carrying value of the liability at the time when the liability is entered into does not exceed the unmatched carrying value of the asset at that time.
(5) For the purposes of section 84A(3A) of the Finance Act 1996 there is prescribed an exchange gain or loss arising to a company in an accounting period in relation to an asset representing a loan relationship of the company which is matched with the whole or part of any share capital of the company.
(6) An asset is matched with share capital if for the accounting period of the company immediately preceding the first accounting period to which these Regulations apply -
(7) In this regulation -
Exchange gains or losses arising from derivative contracts hedging shares etc.
4.
- (1) For the purposes of paragraph 16(3A) and 17C(1)(a) of Schedule 26 to the Finance Act 2002 there is prescribed an exchange gain or loss arising to a company in an accounting period in relation to a derivative contract of the company which is matched with the whole or part of any shares, ships or aircraft.
(2) This regulation does not apply if movements in the fair value of any shares, ships or aircraft which are an asset falling within regulation 4(1) are brought into account by the company in computing, for the purposes of corporation tax, the profits of a trade carried on by it which consists of or includes dealing in shares, ships or aircraft.
(3) Shares, ships or aircraft are matched with a derivative contract if any of the following conditions are satisfied.
Condition 1
The condition is that for the accounting period of the company immediately preceding the first accounting period to which these Regulations apply -
Condition 2
The condition is that for the accounting period, the shares, ships or aircraft are a hedged item under a designated hedge of exchange rate risk in which the derivative contract is the hedging instrument.
Condition 3
The condition is that the underlying subject matter of the derivative contract is such that the company could, by entering into that contract, reasonably expect to eliminate or substantially reduce the economic risk of holding the asset, or part of the asset, which is attributable to fluctuations in exchange rates.
(4) If condition 3 applies, a derivative contract is matched with an asset only to the extent that the carrying value of the derivative contract at the time when the contract is entered into does not exceed the unmatched carrying value of the asset at that time.
(5) In this regulation -
Regulations 3 and 4: supplementary
5.
- (1) Where in any accounting period -
is the same currency, the extent to which an asset is matched is determined in accordance with the following rules.
Rule 1
Liabilities and contracts are regarded as matched to the greatest possible extent with assets which -
Rule 2
Subject to Rule 1, liabilities and contracts are regarded as matched to the greatest possible extent with assets on the disposal of which a chargeable gain would accrue.
Rule 3
Subject to Rules 1 and 2, liabilities are regarded as matched with assets on a disposal of which no chargeable gain would be treated as accruing by virtue of Part 1 of Schedule 7AC to the Taxation of Chargeable Gains Act 1992[6] if the disposal were made on a date falling more than twelve months after the date of the acquisition of the asset.
(2) If -
could reasonably be expected to eliminate or substantially reduce the economic risk of holding the asset which is attributable to fluctuations in exchange rates, the liability or contract is to be treated as being matched with a corresponding amount of value of an asset.
(3) For the purposes of paragraph (1), a currency in which a liability is expressed or which is the underlying subject matter of a derivative contract, is to be treated, if it is not the case, as the same currency in which an asset is denominated if -
could reasonably be expected to eliminate or substantially reduce the economic risk of holding the asset, or part of the asset, which is attributable to fluctuations in exchange rates.
(4) Where regulation 3 or section 84A(3) of the Finance Act 1996 applies to a company in an accounting period in relation to a liability representing a loan relationship there is prescribed, for the purposes of regulation 3 or section 84A(3A) of that Act, an exchange gain or loss treated by virtue of paragraph 6D(2) of Schedule 28AA to the Taxes Act 1988[7] as arising in that accounting period to another company in relation to the same loan relationship.
Rules about fair value profits and losses
6.
- (1) Regulations 7, 8 and 9 contain specific rules about excluding fair value profits and losses for the purposes of Schedule 26 to the Finance Act 2002.
(2) For the purposes of regulations 7, 8 and 9 it is immaterial that the hedging relationship is not an effective hedge for accounting purposes.
(3) A company may elect that -
(4) Any election made under paragraph (3) shall apply to -
(5) A company may elect that regulation 9 shall not apply to its interest rate contracts which satisfy the conditions contained in that regulation and any election under this regulation shall apply to all of the interest rate contracts entered into by the company which satisfy the conditions contained in regulation 9(1).
(6) Subject to paragraph (7), an election under paragraph (3) or (5) shall be made before the start of a company's first accounting period to which these Regulations apply or, if later, before 31st March 2005 and has effect for that accounting period and all subsequent accounting periods unless revoked.
(7) In any case where a company is not a party to any contracts to which regulations 7 or 8, or regulation 9 apply immediately before the start of the company's first accounting period to which the Regulations apply, an election within paragraph (3) or (5) shall be made within 90 days of the company entering into its first contract to which regulation 7 or 8, or regulation 9 applies, as the case may be.
(8) A company may revoke an election under paragraph (3) or (5) with effect from the date on which notice is given of it, but contracts entered into before that date shall not be affected.
(9) An election under paragraph (3) or (5) shall be made, and may be revoked by the company which made it, by notice in writing to the Inland Revenue.
(10) If -
then the other company is to be treated as if it had made the election but only in relation to that contract.
(11) Paragraph (10) does not apply if the electing company, or the other company, entered into the contract in the ordinary course of a banking business or a business as a securities house.
(12) If a contract to which regulation 7, 8 or 9 applies is transferred by a company in circumstances to which paragraph 28 of Schedule 26 to the Finance Act 2002[8] would apply but for paragraph 30[9] of that Schedule -
(13) If a company ("the electing company") makes an election under paragraph (3) or (5) in relation to its contracts -
and the transferee company has not made an election under paragraph (3) or (5) in relation to the contract as the case may be, then the transferee company is to be treated as if it had made the election but only in relation to that contract.
(14) In this Regulation -
Fair value profits or losses arising from derivative contracts which are currency contracts
7.
- (1) For the purposes of paragraph 17C(1)(a) of Schedule 26 to the Finance Act 2002 there is prescribed in relation to a derivative contract whose underlying subject matter consists wholly of currency, all credits and debits representing the whole or part of the fair value profit or loss arising to a company in an accounting period; if the contract satisfies the conditions in paragraph (2).
(2) The conditions referred to in paragraph (1) are -
(3) Where there is a hedging relationship between part of a currency contract and a hedged item, the part of the fair value profit or loss that is prescribed is the part which bears to the whole the proportion which the value of that part of the contract which is in the hedging relationship bears to the value of the whole of the contract.
Profits or losses arising from derivative contracts which are commodity contracts or debt contracts
8.
- (1) For the purposes of paragraph 17C(1)(a) of Schedule 26 to the Finance Act 2002 there is prescribed in relation to a commodity contract or a debt contract all credits and debits representing the whole or part of the fair value profit or loss arising to a company in an accounting period if -
(2) In this regulation -
(3) Where there is a hedging relationship between part of a commodity contract or part of a debt contract as the case may be and a hedged item, the part of the fair value profit or loss that is prescribed is the part which bears to the whole the proportion which the value of that part of the contract which is in the hedging relationship bears to the value of the whole of the contract.
Profits or losses arising from derivative contracts which are interest rate contracts
9.
- (1) For the purposes of paragraph 17C(1)(a) of Schedule 26 to the Finance Act 2002 there is prescribed all credits and debits representing the whole or part of the fair value profit or loss arising to a company in relation to its interest rate contracts in an accounting period if -
(2) Where paragraph (1) applies, credits and debits shall be brought into account for the purposes of paragraph 17C(1)(b) of Schedule 26 to the Finance Act 2002 on the assumption that an appropriate accruals basis had been used in relation to the contract for that accounting period.
(3) Where paragraph 16(3) of Schedule 26 to the Finance Act 2002[13] or regulation 4 apply to a contract to which this regulation applies nothing in this regulation is to require any exchange gains or losses in relation to that contract to be brought into account.
(4) In this regulation -
represent the credits or debits that would be given by generally accepted accounting practice in relation to an asset or liability representing a loan relationship whose terms include those of both the hedged item and the interest rate contract;
(c) exchange gains and losses are recognised as a result of the translation of the contract at the balance-sheet date; and
(d) profits and losses which arise as a result of the contract coming to an end before its stated date of maturity are amortised and brought into account over the unexpired term of the hedged item.
(5) For the purposes of paragraph 17C(1)(a) of Schedule 26 to the Finance Act 2002, there is also prescribed for any period any credits and debits which -
(6) Where credits and debits are prescribed by sub-paragraph (5) there is also prescribed, for the purposes of paragraph 17C(1)(a) of Schedule 26 to the Finance Act 2002, any debits and credits corresponding to the sub-paragraph (5) credits and debits which are brought into account in the profit and loss account or income statement when -
(7) This regulation does not apply to any contract to which paragraphs 6,7 or 8 of Schedule 26 to the Finance Act 2002[14] applies.
Bringing fair value profits or losses into account on currency and commodity contracts
10.
- (1) For the purposes of paragraph 17C(1)(c) of Schedule 26 to the Finance Act 2002 -
This is subject to paragraphs (3), (5), (7) and (8).
(2) In paragraph (1) a "termination event" occurs -
(3) If the forecast transaction or firm commitment which is the hedged item mentioned in regulation 7 or regulation 8 is a forecast transaction of, or a firm commitment to a purchase of, anything the expenditure in relation to which -
then the aggregate mentioned in paragraph (1)(a) in relation to the contract is to be brought into account in the accounting period in which the expenditure falls or would fall to be deducted.
(4) In paragraph (3) "property business" has the meaning given in paragraph 32(2) of Schedule 29 to the Finance Act 2002[15] (gains and losses of a company from intangible fixed assets).
(5) Where -
paragraph (1)(b) is to apply to a proportionate amount of the aggregate.
(6) In paragraph (5) "proportionate amount" means that proportion of the relevant aggregate amount which is -
(7) Where immediately on ceasing to be a party to the contract ("the old contract"), the company enters into another contract ("the new contract") which meets the conditions in regulation 7 or regulation 8 in relation to the same hedged item as was the hedged item in relation to the old contract -
(8) Where as a result of the company ("the transferor company") ceasing to be a party to the contract ("the old contract") -
paragraph (9) applies.
(9) Where this paragraph applies -
(10) For the purposes of paragraph 17C(1)(a) of Schedule 26 to the Finance Act 2002, there is also prescribed for any period any credits and debits which -
(11) Where credits and debits are prescribed by sub-paragraph (10) there is also prescribed, for the purposes of paragraph 17C(1)(a) of Schedule 26 to the Finance Act 2002, any debits and credits corresponding to the sub-paragraph (10) credits and debits which are brought into account in the profit and loss account or income statement when -
Derek Twigg
Nick Ainger
Two of the Lords Commissioners of Her Majesty's Treasury
9th December 2004
[2] 2002 c. 23. Paragraph 16(3A) was substituted by paragraph 48(2), and paragraphs 17C(1) and 17C(3)(b) were substituted by paragraph 50, of Part 2 of Schedule 10 to the 2004 Act.back
[3] Section 103 was inserted by paragraph 17(2)(b) of Part 1 of Schedule 10 to the 2004 Act.back
[6] 1992 c. 12. Part 1 was inserted by paragraph 1 of Part 1 of Schedule 8 to the Finance Act 2002.back
[7] 1988 c. 1. Schedule 28AA was inserted by Schedule 16 to the Finance Act 1998 (c. 36). Paragraph 6D was inserted by section 35(2) of the 2004 Act.back
[8] Paragraph 28 was amended by section 179(1), (2), (3) and (5) of the Finance Act 2003 (c. 14) and section 30 of and paragraph 15(2) of Schedule 5 to the 2004 Act.back
[9] Paragraph 30 was amended by section 179(4) and (5) of the Finance Act 2003 and section 52 of and paragraph 57of Schedule 10 to the 2004 Act.back
[12] Section 349(5) and (6) were added by section 95 of the Finance Act 2002.back
[13] 2002 c. 23. Sub-paragraph (3) was substituted by subsequent sub-paragraphs (3) and (3A) by paragraph 48(2) of Part 2 of Schedule 10 to the 2004 Act.back
[14] Paragraphs 6, 7 and 8 of Schedule 26 were amended by articles 1 and, respectively, 8, 9 and 10 of S.I. 2004/2201.back