Office of Public Sector Information
Section 82
1 Chapter 2 of Part 4 of the Finance Act 1996 (c. 8) (loan relationships) is amended in accordance with the following provisions of this Part of this Schedule.
2 (1) Section 81 is amended as follows.
(2) In subsection (2) (which defines a money debt as a debt which falls to be settled by the payment of money etc)—
(a) for “which falls” substitute “which is, or has at any time been, one that falls, or that may at the option of the debtor or of the creditor fall,”; and
(b) after paragraph (b) insert—
“disregarding any other option exercisable by either party.”.
3 (1) Section 83 is amended as follows.
(2) In subsection (2) (ways in which relief may be given on a claim in respect of the whole or any part of the deficit) after “the deficit”, where first occurring, insert “(to the extent that it is not surrendered as group relief by virtue of section 403 of the Taxes Act 1988)”.
(3) At the end of paragraph (a) of that subsection (claim to set off against other profits of the period) insert “or”.
(4) Paragraph (b) of that subsection (claim to treat as eligible for group relief) shall cease to have effect.
(5) Paragraph (d) of that subsection (claim to carry forward and set against non-trading profits of next accounting period) shall cease to have effect.
(6) For subsection (3) (any balance to be carried forward and treated as a deficit of the next accounting period) substitute—
“(3A) So much of the deficit for the deficit period as is not—
(a) surrendered as group relief by virtue of section 403 of the Taxes Act 1988, or
(b) treated in any of the ways specified in subsection (2) above,
shall be carried forward and set against non-trading profits of the company for succeeding accounting periods.”.
(7) Subsection (4) (provisions relating to amount carried forward and treated as deficit for next accounting period, which becomes of no further utility) shall cease to have effect.
(8) In subsection (9) (which introduces Schedule 8) for “subsection (2) above)” substitute “subsection (2)(a) or (c) above or where subsection (3A) above has effect)”.
4 (1) Section 84 is amended as follows.
(2) In subsection (2)(b) (which provides that the reference in subsection (1) to profits, gains and losses includes any which, in accordance with normal accountancy practice, are carried to or sustained by certain reserves) for “normal accountancy practice” substitute “generally accepted accounting practice”.
(3) After subsection (4) insert—
“(4A) Where—
(a) different authorised accounting methods are used for the purposes of this Chapter as respects the same loan relationship for different parts of the same accounting period or for successive accounting periods, and
(b) no debit or credit falls to be brought into account under subsection (2)(c) or (3)(b) of section 90 below in consequence of the change of method, but
(c) an amount is brought into account for the purposes of the company’s statutory accounts in respect of the change of method,
that amount shall be taken for the purposes of this Chapter to be included among the sums in respect of which debits and credits fall to be brought into account for the purposes of this Chapter in accordance with subsection (1)(a) above.”.
5 (1) Section 85 is amended as follows.
(2) In subsection (2) (accounting methods authorised only if the conditions in the paragraphs of the subsection are satisfied) for paragraph (a) (conformity to normal accountancy practice) substitute—
“(a) subject to paragraphs (b) to (c) below, it is in conformity with generally accepted accounting practice to use that method in that case;”.
(3) In paragraph (b) of that subsection (provision for allocating payments under a loan relationship to accounting periods) after “payments under a loan relationship” insert “, or arising as a result of a related transaction,”.
6 (1) Section 86 is amended as follows.
(2) In subsection (3) (method to be used where basis used in statutory accounts is, or equates to, an authorised accounting method) after paragraph (b) insert—
“but this subsection is subject to subsections (3A) and (3D) below.”
(3) After subsection (3) insert—
“(3A) If, in the case of a company falling within subsection (8)(c) or (d) below, an authorised mark to market basis of accounting—
(a) would be used as respects some or all of the company’s loan relationships, were the company a UK company following generally accepted accounting practice, but
(b) is not the basis of accounting used as respects those loan relationships in the company’s statutory accounts,
the company may elect to use an authorised mark to market basis of accounting as its authorised accounting method for the purposes of this Chapter in relation to every loan relationship as respects which that basis would be used if the company were a UK company following generally accepted accounting practice.
(3B) Any election under subsection (3A) above—
(a) must be made before the expiration of the period of two years following the end of the company’s first accounting period beginning on or after 1st October 2002 in which it is party to a loan relationship in relation to which such an election may be made;
(b) has effect for that accounting period and all subsequent accounting periods of the company; and
(c) is irrevocable.
(3C) A company which makes an election under sub-paragraph (3A) above as respects its loan relationships shall be taken for the purposes of Schedule 26 to the Finance Act 2002 (derivative contracts) to have at the same time made an election under sub-paragraph (2) of paragraph 19 of that Schedule having effect—
(a) for the accounting periods mentioned in subsection (3B)(b) above, and
(b) as respects any derivative contracts to which the company is or may become party in any of those accounting periods,
and that election shall so have effect notwithstanding anything in paragraph (a) or (b) of sub-paragraph (3) of that paragraph.
(3D) If, in the case of a company falling within subsection (8)(c) or (d) below which has not made an election under subsection (3A) above,—
(a) an authorised mark to market basis of accounting would be used for an accounting period—
(i) as respects some or all of the company’s loan relationships, and
(ii) as respects some or all of the company’s derivative contracts,
were the company a UK company following generally accepted accounting practice, and
(b) that basis of accounting—
(i) is used in the company’s statutory accounts as respects those derivative contracts for that accounting period, but
(ii) is not the basis of accounting used in those accounts as respects those loan relationships for that accounting period,
the company must for that accounting period use an authorised mark to market basis of accounting as its authorised accounting method for the purposes of this Chapter in relation to every loan relationship as respects which that basis would be used if the company were a UK company following generally accepted accounting practice.”.
(4) In subsection (4) (authorised accruals basis to be used where authorised accounting method not determined under subsection (3)) for “determined under subsection (3) above,” substitute the following paragraphs—
“(a) a method determined under subsection (3) above,
(b) an authorised mark to market method in accordance with an election under subsection (3A) above, or
(c) an authorised mark to market method in accordance with subsection (3D) above,”.
(5) In subsection (7) (meaning of “fair value”) the words from ““fair value”” onwards become a separate definition and after that definition insert the following definition—
““UK company” means a company incorporated or formed under the law of a part of the United Kingdom.”.
(6) In subsection (8) (meaning of “statutory accounts” in the section) for “In this section” substitute “In this Chapter”.
7 (1) Section 87 is amended as follows.
(2) In subsection (3) (meaning of connection between company and another person) in paragraph (a) (case where one company has had control of the other in an accounting period or in the two years preceding it)—
(a) omit “, or in the two years before the beginning of that period,”; and
(b) at the end of the paragraph, insert “or”.
(3) In paragraph (b) of that subsection (case where both companies under control of same person in that period or those two years) omit “, or in those two years,”.
(4) Omit paragraph (c) of that subsection (company was close company and other person was participator or associate of participator in that period or those two years).
(5) In subsection (5) (persons indirectly standing in position of creditor or debtor by reference to a series of loan relationships) after “series of loan relationships” insert “or money debts which would be loan relationships if a company directly stood in the position of creditor or debtor”.
(6) After subsection (5) insert—
“(5A) Where a trade, profession or business is carried on by two or more persons in partnership (“the firm”) and the firm stands in the position of a creditor or debtor as respects a money debt, any question—
(a) whether there is for the purposes of this Chapter a connection, within the meaning of this section, between any two companies for an accounting period in the case of a loan relationship, or
(b) to what extent any amount is to be treated under this Chapter in any particular way as a result of there being, or not being, such a connection,
shall be determined as if to the extent of his appropriate share each of the partners separately, instead of the firm, stood in the position of a creditor or, as the case may be, debtor as respects the money debt.
The reference in the words following paragraph (b) above to partners does not include a reference to the general partner of a limited partnership which is a collective investment scheme within the meaning of section 235 of the Financial Services and Markets Act 2000.
(5B) For the purposes of subsection (5A) above, a partner’s “appropriate share” is the share that would be apportioned to him if an apportionment were made in the shares in which any profit or loss computed in accordance with subsection (1) of section 114 of the Taxes Act 1988 for the accounting period in question would be apportioned between the partners under subsection (2) of that section.”.
(7) Omit subsections (6) to (8) (meaning of “control”, “participator” and “associate”).
8 After section 87 insert—
(1) For the purposes of section 87 above, “control”, in relation to a company, means the power of a person to secure—
(a) by means of the holding of shares or the possession of voting power in or in relation to the company or any other company, or
(b) by virtue of any powers conferred by the articles of association or other document regulating the company or any other company,
that the affairs of the company are conducted in accordance with his wishes.
(2) There shall be left out of account for the purposes of this section—
(a) any shares held by a company, and
(b) any voting power or other powers arising from shares held by a company,
if a profit on a sale of the shares would be treated as a trading receipt of a trade carried on by the company and the shares are not, within the meaning of Chapter 1 of Part 12 of the Taxes Act 1988, assets of an insurance company’s long-term insurance fund (see section 431(2) of that Act).
(3) Where section 114 of the Taxes Act 1988 (partnerships involving companies: special rules for computing profits and losses) applies in relation to a partnership, any property, rights or powers held or exercisable for the purposes of the partnership shall be treated for the purposes of this section, as respects any time in an accounting period of the partnership, as if—
(a) the property, rights or powers had been apportioned between, and were held or exercisable by, the partners severally, and
(b) the apportionment had been in the shares in which the profit or loss of the accounting period of the partnership would be apportioned between the partners under subsection (2) of that section,
but taking the references in paragraphs (a) and (b) above to partners as not including a reference to the general partner of a limited partnership which is a collective investment scheme within the meaning of section 235 of the Financial Services and Markets Act 2000.”.
9 Section 89 (which has become unnecessary because, in accordance with generally accepted accounting practice, a similar adjustment falls to be recognised in the profit and loss account of the company and debits or credits accordingly fall to be brought into account pursuant to section 84(1) of the Finance Act 1996 (c. 8)) shall cease to have effect.
10 (1) Section 90 is amended as follows.
(2) In subsection (1) (application of section) after “where” insert “(a)” and at the end of the subsection add—
“(b) the change of method is in pursuance of a requirement of this Chapter as to the basis of accounting to be used for the purposes of this Chapter in the case of the loan relationship; and
(c) the case does not fall within subsection (1A) below”.
(3) After subsection (1) insert—
“(1A) The case falls within this subsection if, for the purposes of the company’s statutory accounts, the different authorised accounting methods mentioned in subsection (1) above are also used as respects the loan relationship for the same parts of the same accounting period or, as the case may be, for the same successive accounting periods as are mentioned in subsection (1) above.”.
11 Section 91 shall cease to have effect.
12 (1) Section 94 is amended as follows.
(2) After subsection (3) (adjustment of opening value by reference to movement in retail prices index between earlier time and later time) insert—
“(3A) Where the authorised accounting method applied is an accruals basis of accounting, the amount which is the opening value shall be taken to be the amount of the value which (disregarding interest) accrued to the company under the loan relationship before the earlier time.”.
(3) In subsection (6) (the percentage increase or decrease in retail prices index) after paragraph (b) insert—
“except that where the earlier time falls at the beginning of an accounting period which begins with the first day of a month, the index for the previous month shall be used for the purposes of paragraph (a) above.”.
13 (1) Section 97 is amended as follows.
(2) In subsection (1) (application of section)—
(a) for “This section applies where—” substitute “For the purposes of the Corporation Tax Acts, a company has a relationship to which this section applies in any case where—”;
(b) in paragraph (a), for “any company” substitute “the company”;
(c) in paragraph (b), for “that relationship” substitute “that loan relationship”; and
(d) after paragraph (b), add—
“and references to a relationship to which this section applies, and to a company’s being party to such a relationship, shall be construed accordingly”.
(3) For subsection (2) (treatment of the manufactured interest) substitute—
“(2) Where a company has a relationship to which this section applies—
(a) this Chapter shall have effect in relation to the company and the manufactured interest under the relationship—
(i) as it would have effect if the manufactured interest were interest payable on a loan by, or (as the case may be) to, the company and were accordingly interest under a loan relationship to which the company is a party, and
(ii) where that company is the company to which the manufactured interest is payable, as if that relationship were the one under which the real interest is payable, but
(b) the only credits or (subject to subsection (4A) below) debits to be brought into account for the purposes of this Chapter by virtue of this section in respect of a relationship are those relating to that interest,
and, subject to paragraphs (a)(ii) and (b) above, references in the Corporation Tax Acts to a loan relationship accordingly include a reference to a relationship to which this section applies.”.
(4) After subsection (3) (trading and non-trading debits and credits) insert—
“(3A) To the extent that debits or credits fall to be brought into account by a company under section 82(2) above in the case of a relationship to which this section applies, the company shall be regarded for the purposes of this Chapter as being party to the relationship for the purposes of a trade carried on by the company.”.
(5) In subsection (4) (which applies the section to a deemed manufactured payment under section 737A(5) of the Taxes Act 1988 as if such a representative payment had in fact been made) before “737A(5)” insert “736B(2) or”.
(6) After subsection (4) insert—
“(4A) Where, for the purposes of section 736B of the Taxes Act 1988, a company is the borrower under a stock lending arrangement, then (pursuant to subsection (2A) of that section (which precludes deductions or group relief for the borrower)) no debits are to be brought into account for the purposes of this Chapter by that company in respect of the deemed representative payment under that section which is treated under subsection (4) above as if it had in fact been made.”.
14 In section 103(1) (definitions) in the definition of “share”, at the end insert “but does not include a share in a building society”.
15 In section 103(1) (definitions) insert the following definitions at the appropriate place—
““derivative contract” has the same meaning as in Schedule 26 to the Finance Act 2002;”;
““statutory accounts” has the meaning given by section 86(8) above”.
16 At the end of section 103 (interpretation) insert—
“(6) Where—
(a) a company ceases to be a party to a loan relationship in an accounting period (the “cessation period”),
(b) profits, gains or losses arise to the company from the loan relationship or a related transaction in that accounting period, and
(c) the credits or debits brought into account for the purposes of this Chapter for that accounting period do not include credits or debits which represent the whole of those profits, gains or losses,
credits or debits in respect of so much of those profits, gains or losses as are not represented by credits or debits brought into account for the cessation period shall continue to be brought into account under this Chapter over one or more subsequent accounting periods (“post-cessation periods”) as in the case of a loan relationship to which the company is a party in those periods, and subsections (7) and (8) below shall apply.
(7) In any case falling within subsection (6) above, any question—
(a) whether, in a post-cessation period, the company is to any extent a party to the loan relationship—
(i) for the purposes of a trade carried on by it, or
(ii) for any other particular purpose or purposes, or
(b) whether, in a post-cessation period, the loan relationship is to any extent referable to a particular business, or a particular class, category or description of business, carried on by the company,
shall be determined by reference to the circumstances immediately before the company ceased to be a party to the loan relationship instead of the circumstances in the post-cessation period.
(8) In any case falling within subsection (6) above, any question—
(a) whether the loan relationship has to any extent a particular purpose in a post-cessation period, or
(b) whether there is a connection between the company and any other person for a post-cessation period,
shall be determined by reference to the circumstances in the cessation period instead of the circumstances in the post-cessation period.”.
17 In Schedule 8 (loan relationships: claims relating to deficits) paragraph 2 (claims under section 83(2)(b)) shall cease to have effect.
18 (1) Paragraph 3 of Schedule 8 is amended as follows.
(2) In sub-paragraph (2)(a)(i) (which refers to a claim under section 83(2)(a) or (b)) for “under subsection (2)(a) or (b)” substitute “under subsection (2)(a)”.
(3) In sub-paragraph (6)(e) (which refers to a claim under section 83(2)(a) or (b)) for “under section 83(2)(a) or (b)” substitute “under section 83(2)(a)”.
19 (1) Paragraph 4 of Schedule 8 (claim to carry forward deficit to next accounting period) is amended as follows.
(2) For sub-paragraph (1) (application of paragraph) substitute—
“(1) This paragraph applies where, pursuant to section 83(3A) of this Act, any of the deficit for a deficit period is to be carried forward and set against non-trading profits for succeeding accounting periods.”.
(3) In sub-paragraph (2) (treatment of amount to which the claim relates) for “The amount to which the claim relates” substitute “The amount carried forward from the deficit period, reduced by any amount claimed under sub-paragraph (3) below,”.
(4) Re-number sub-paragraph (3) (definition of “non-trading profits”) as sub-paragraph (6) and before that sub-paragraph insert—
“(3) The company may make a claim for so much of the amount carried forward from the deficit period as may be specified in the claim to be excepted from being set against non-trading profits of the accounting period immediately following the deficit period.
(4) Any claim under sub-paragraph (3) above must be made before the expiration of the period of 2 years following the end of that accounting period.
(5) So much of the amount carried forward from the deficit period as—
(a) cannot be relieved under sub-paragraph (2) above against non-trading profits of the accounting period immediately following the deficit period, or
(b) is the subject of a claim under sub-paragraph (3) above in respect of that accounting period,
shall be treated for the purposes of this Chapter as if it were an amount of non-trading deficit on the company’s loan relationships for that accounting period which, pursuant to section 83(3A) of this Act, falls to be carried forward and set against non-trading profits of succeeding accounting periods (and this paragraph shall apply accordingly).”.
(5) In consequence of the amendments made by this paragraph—
(a) the heading to that paragraph becomes “Carry forward of deficit to succeeding accounting periods”; and
(b) in the title of the Schedule, “claims” becomes “claims etc”.
20 In Schedule 9 (loan relationships: special computational provisions) in paragraph 1, at the beginning insert “(1)” and at the end insert—
“(2) Nothing in section 80(5) of this Act prevents an amount which, by virtue of sub-paragraph (1) above, is not brought into account for the purposes of this Chapter from being brought into account for the purposes of corporation tax apart from this Chapter.”.
21 After paragraph 1 of Schedule 9 insert—
1A (1) The credits and debits to be brought into account for the purposes of this Chapter shall not include any credits or debits relating to—
(a) a policy of life assurance; or
(b) a capital redemption policy, within the meaning of Chapter 2 of Part 13 of the Taxes Act 1988.
(2) Nothing in section 80(5) of this Act prevents an amount which, by virtue of sub-paragraph (1) above, is not brought into account for the purposes of this Chapter from being brought into account for the purposes of corporation tax apart from this Chapter.”.
22 (1) Paragraph 2 of Schedule 9 is amended as follows.
(2) In sub-paragraph (1) (application of paragraph) for the words following “company” substitute “(“the debtor company”) in a case falling within any of sub-paragraphs (1A) to (1D) below.”.
(3) After sub-paragraph (1) insert—
“(1A) The first case is where there is, for the relevant accounting period, a connection (within the meaning of section 87 of this Act) between the debtor company and a person standing in the position of creditor as respects the loan relationship.
(1B) The second case is where there is a time in the relevant accounting period when the debtor company is a close company and a person standing in the position of a creditor as respects the loan relationship is—
(a) a participator in the debtor company,
(b) the associate of a person who is such a participator at that time, or
(c) a company of which such a participator has control or in which such a participator has a major interest,
and the debt is not one that is owed to, or to persons acting for, a limited partnership which is a collective investment scheme within the meaning of section 235 of the Financial Services and Markets Act 2000.
(1C) The third case is where—
(a) a person standing in the position of a creditor as respects the loan relationship is a company (“the creditor company”); and
(b) there is a time in the relevant accounting period when the debtor company has a major interest in the creditor company or the creditor company has a major interest in the debtor company.
(1D) The fourth case is where the loan is one made by trustees of a retirement benefits scheme (as defined in section 611 of the Taxes Act 1988) and—
(a) there is a time in the relevant accounting period when the debtor company is the employer of employees to whom the scheme relates; or
(b) there is for the relevant accounting period a connection, within the meaning of section 87 of this Act, between the debtor company and such an employer; or
(c) a company is such an employer and there is a time in the relevant accounting period when the debtor company has a major interest in that company or that company has a major interest in the debtor company.”.
(4) After sub-paragraph (2) insert—
“(3) References in this paragraph to a person who stands in the position of a creditor as respects a loan relationship include references to a person who indirectly stands in that position by reference to a series of loan relationships or money debts which would be loan relationships if a company directly stood in the position of creditor or debtor.
(4) Where this paragraph applies in relation to a debtor relationship by virtue of sub-paragraph (3) above, the reference to the corresponding creditor relationship in sub-paragraph (2)(b) above is a reference to the creditor relationship of the person who indirectly stands in the position of a creditor as respects the debtor relationship.
(5) For the purposes of this section, section 414 of the Taxes Act 1988 (meaning of “close company” in the Tax Acts) shall have effect with the omission of subsection (1)(a) (exclusion of companies not resident in the United Kingdom).
(6) In this paragraph—
“associate” has the meaning given by section 417(3) and (4) of the Taxes Act 1988;
“control” has the same meaning as in section 87 of this Act (see section 87A);
“participator”, in relation to a close company, means a person who, by virtue of section 417 of the Taxes Act 1988, is a participator in the company for the purposes of Part 11 of that Act, other than a person who is a participator for those purposes by virtue only of being a loan creditor of the company;
“the relevant accounting period” means the accounting period mentioned in sub-paragraph (2)(a) above.
(7) Paragraph 20 below (major interests) applies for the purposes of this paragraph.”.
23 In Schedule 9, after paragraph 5 (bad debt etc) insert—
5A (1) This paragraph applies where the conditions in sub-paragraphs (2) and (3) below are satisfied.
(2) The first condition is that by virtue of paragraph 5 above a debit is or has been brought into account for the purposes of this Chapter for any group accounting period by—
(a) a company (“the member company”) which is a member of a consortium by which a consortium company is owned; or
(b) a company (a “group member”) which is a member of the same group of companies as the member company but is not itself a member of the consortium.
(3) The second condition is that the debit is or was in respect of a creditor relationship of the member company or group member and—
(a) the consortium company, or
(b) if that company is a holding company, a consortium company which is a subsidiary of that company,
is or, as the case may be, was the debtor (“the debtor consortium company”).
Finance Act 2002