Office of Public Sector Information
SCHEDULE 26 continued PART 6 continued
(3) The credits and debits to be brought into account for the purposes of this Schedule in the case of the two companies shall be determined as follows—
(a) the transaction, or series of transactions, by virtue of which the replacement takes place shall be disregarded except for the purpose of identifying the company in whose case any credit or debit not relating to that transaction, or those transactions, is to be brought into account; and
(b) the transferor company and the transferee company shall be deemed (except for that purpose) to be the same company.
(4) References in this paragraph to one company replacing another as a party to a derivative contract shall include references to a company becoming a party to any derivative contract which confers rights or imposes duties which are equivalent to any rights or duties of the other company under a derivative contract of which that other company has previously ceased to be a party.
(5) In this paragraph “insurance business transfer scheme” means a scheme falling within section 105 of the Financial Services and Markets Act 2000 (c. 8), including an excluded scheme falling within Case 2, 3 or 4 of subsection (3) of that section.
(6) In this paragraph references to companies being members of the same group of companies shall be construed in accordance with section 170 of the Taxation of Chargeable Gains Act 1992 (c. 12).
(7) This paragraph has effect subject to paragraphs 29 and 30.
29 (1) Paragraph 28 does not apply by virtue of sub-paragraph (2)(a) or (b) of that paragraph in relation to any transfer of an asset, or of any rights or duties under or interest in an asset, where the asset was within one of the categories set out in section 440(4)(a) to (e) of the Taxes Act 1988 (assets held for certain categories of long term business) either immediately before the transfer or immediately afterwards.
(2) Paragraph 28 does not apply by virtue of sub-paragraph (2)(c) or (d) of that paragraph in relation to any transfer of an asset, or of any rights or duties under or interest in an asset, where the asset—
(a) was an asset within one of the categories set out in section 440(4) of the Taxes Act 1988 immediately before the transfer, and
(b) is not an asset within that category immediately afterwards.
(3) For the purposes of sub-paragraph (2) above, where one of the companies is an overseas life insurance company an asset shall be taken to be within the same category both immediately before the transfer and immediately afterwards if it—
(a) was an asset within one category immediately before the transfer, and
(b) is an asset within the corresponding category immediately afterwards.
(4) In this paragraph “overseas life insurance company” has the same meaning as in Chapter 1 of Part 12 of the Taxes Act 1988.
30 Paragraph 28 does not apply where the transferor company uses an authorised mark to market basis of accounting as respects the derivative contract in question, but in any such case the amount to be brought into account by the transferee company in respect of the transaction referred to in that paragraph, or in respect of the series of transactions there referred to, taken together, must be the fair value of the derivative contract as at the date of transfer to the transferee company.
31 (1) This paragraph applies in relation to a company where, as a result of any transaction,—
(a) the company and a non-resident both become party to a derivative contract,
(b) the company becomes party to a derivative contract to which a non-resident is party, or
(c) a non-resident becomes party to a derivative contract to which the company is party.
(2) For each accounting period for any part of which the company and the non-resident are both party to a derivative contract, the credits and debits which fall, in the case of the company, to be brought into account for the purposes of this Schedule as respects the derivative contract shall not include, in a case where that contract makes provision for notional interest payments, any relevant debit arising in relation to that contract.
(3) For the purposes of sub-paragraph (2) the amount of a relevant debit shall be computed by determining, as regards that accounting period, the amount (if any) by which—
(a) the aggregate of any notional interest payments made by the company to the non-resident while the company and the non-resident are both party to the derivative contract, exceeds
(b) the aggregate of any notional interest payments made by the non-resident to the company during that time.
(4) For the purposes of sub-paragraphs (2) and (3) a notional interest payment is any payment the amount of which falls to be determined (wholly or mainly) by applying to a notional principal amount specified in a derivative contract, for a period so specified, a rate the value of which at all times is the same as that of a rate of interest so specified.
(5) Sub-paragraph (2) shall not apply where the company is a bank, building society, financial trader or recognised clearing house and—
(a) the company is party to the derivative contract solely for the purposes of a trade or part of a trade carried on by it in the United Kingdom, and
(b) it is party to the derivative contract otherwise than as agent or nominee of another person.
(6) Sub-paragraph (2) shall not apply where—
(a) the non-resident is party to the derivative contract solely for the purposes of a trade or part of a trade carried on by him in the United Kingdom through a branch or agency, and
(b) he is party to the derivative contract otherwise than as agent or nominee of another person.
(7) Sub-paragraph (2) shall not apply where arrangements made in relation to the territory in which the non-resident is resident—
(a) have effect by virtue of section 788 of the Taxes Act 1988, and
(b) make provision, whether for relief or otherwise, in relation to interest (as defined in the arrangements).
(8) Where the non-resident is party to the contract as agent or nominee of another person, sub-paragraph (7) shall have effect as if the reference to the territory in which the non-resident is resident were a reference to the territory in which that other person is resident.
(9) In this paragraph—
“non-resident” means a person who is not resident in the United Kingdom;
“recognised clearing house” has the meaning given by section 285 of the Financial Services and Markets Act 2000 (c. 8).
32 (1) Where any profits or losses arising to an authorised unit trust from a derivative contract in an accounting period are capital profits or losses, they must not be brought into account as credits or debits for the purposes of this Schedule, notwithstanding paragraph 15.
(2) For the purposes of this paragraph, capital profits and losses arising from a derivative contract in an accounting period are such profits and losses arising from a derivative contract as fall to be dealt with under—
(a) the heading “net gains/losses on investments during the period”, or
(b) the heading “other gains/losses”,
in the statement of total return for the accounting period.
(3) For the purposes of sub-paragraph (2), the statement of total return for an accounting period is the statement of total return which, in accordance with the Statement of Recommended Practice used for the accounting period, must be included in the accounts contained in the annual report of the authorised unit trust which deals with the accounting period.
(4) For the purposes of sub-paragraph (3), the “Statement of Recommended Practice” used for an accounting period is—
(a) in relation to any accounting period for which it is required or permitted to be used, the Statement of Recommended Practice relating to Authorised Unit Trust Schemes issued by the Investment Management Regulatory Organisation Limited in January 1997, as from time to time modified, amended or revised, or
(b) in relation to any accounting period for which it is required or permitted to be used, any subsequent statement of recommended practice dealing with accounting requirements relating to authorised unit trust schemes, as from time to time modified, amended or revised.
33 (1) Where any profits or losses arising to an open-ended investment company from a derivative contract in an accounting period are capital profits or losses, they must not be brought into account as credits or debits for the purposes of this Schedule, notwithstanding paragraph 15.
(2) For the purposes of this paragraph, capital profits and losses arising from a derivative contract in an accounting period are such profits and losses arising from a derivative contract as fall to be dealt with under—
(a) the heading “net gains/losses on investments during the period”, or
(b) the heading “other gains/losses”,
in the statement of total return for the accounting period.
(3) For the purposes of sub-paragraph (2), the statement of total return for an accounting period is the statement of total return which, in accordance with the Statement of Recommended Practice used for the accounting period, must be included in the accounts contained in the annual report of the open-ended investment company which deals with the accounting period.
(4) For the purposes of sub-paragraph (3), the “Statement of Recommended Practice” used for an accounting period is—
(a) in relation to any accounting period for which it is required or permitted to be used, the Statement of Recommended Practice relating to Open-Ended Investment Companies issued by the Financial Services Authority in November 2000, as from time to time modified, amended or revised, or
(b) in relation to any accounting period for which it is required or permitted to be used, any subsequent statement of recommended practice dealing with accounting requirements relating to open-ended investment companies issued by the Financial Services Authority, as from time to time modified, amended or revised.
34 (1) The Treasury may by order amend paragraph 32 or 33 so as to alter the definition of capital profits or losses in consequence of the modification, amendment, revision or replacement of a Statement of Recommended Practice.
(2) The power to make an order under this paragraph includes power—
(a) to make different provision for different cases, and
(b) to make such consequential, supplementary, incidental or transitional provisions, or savings, as appear to the Treasury to be necessary or expedient (including provision amending any enactment or any instrument made under an enactment).
35 (1) For the purposes of paragraph 5(1) of Schedule 27 to the Taxes Act 1988 (computation of UK equivalent profit), the assumptions to be made in determining what, for any period, would be the total profits of an offshore fund are to include the assumptions in sub-paragraphs (2) and (3).
(2) The first assumption is that this Schedule does not apply for the purposes of corporation tax in computing the profits or loss of an offshore fund.
(3) The second assumption is that for the purposes of corporation tax the profits and losses that are to be taken to arise from the derivative contracts of an offshore fund are to be computed—
(a) in accordance with the provisions applicable, in the case of unauthorised unit trusts, for the purposes of income tax; and
(b) as if the provisions so applicable had effect in relation to an accounting period of an offshore fund as they have effect, in the case of unauthorised unit trusts, in relation to a year of assessment.
(4) In this paragraph “unauthorised unit trust” means the trustees of any unit trust scheme which is not an authorised unit trust but is a unit trust scheme for the purposes of section 469 of the Taxes Act 1988.
36 (1) This paragraph applies in relation to a relevant contract to which a company is party in an accounting period if—
(a) it is not a derivative contract for the purposes of this Schedule, and
(b) its underlying subject matter consists wholly or partly of a holding which is, in that period, a relevant holding.
(2) Where this paragraph applies in relation to a relevant contract of a company in an accounting period—
(a) the Corporation Tax Acts shall have effect for that period (and any succeeding accounting period in which the relevant contract is a relevant contract of the company) as if the relevant contract were a derivative contract, and
(b) the accounting method to be used as regards the relevant contract for that period (and any such succeeding period) shall be an authorised mark to market basis of accounting.
(3) For the purposes of this paragraph a person holds a relevant holding in an accounting period if, at any time in that period, he holds—
(a) any rights under a unit trust scheme,
(b) any shares in an open-ended investment company, or
(c) any relevant interests in an offshore fund,
and there is a time in that period when that scheme, company or fund fails to satisfy the non-qualifying investments test.
(4) For the purposes of this paragraph—
(a) “a relevant interest in an offshore fund” has the same meaning as in paragraph 7 of Schedule 10 to the Finance Act 1996 (c. 8), and
(b) a unit trust scheme, open-ended investment company or offshore fund fails to satisfy the non-qualifying investments test if it fails to satisfy the test in paragraph 8 of that Schedule.
37 (1) This paragraph applies if the conditions in sub-paragraphs (2) and (3) are satisfied in relation to any relevant contract of a company.
(2) The first condition is that—
(a) the company is party to the relevant contract in two successive accounting periods (“the first and second accounting periods”), and
(b) paragraph 36 applies in relation to that relevant contract for the second accounting period but not the first.
(3) The second condition is that the relevant contract was, immediately before the beginning of the second accounting period, a chargeable asset.
(4) Where an opening valuation of the relevant contract falls to be made at the beginning of the second accounting period (for the purposes of bringing an amount into account for that period on a mark to market basis of accounting), the value of that contract at that time shall be taken for the purpose of the opening valuation to be equal to whatever, in relation to a disposal immediately before the end of the first accounting period, would have been taken to be the market value of that contract for the purposes of the Taxation of Chargeable Gains Act 1992 (c. 12).
(5) When the company ceases to be a party to the relevant contract it shall bring into account, for the accounting period in which it ceased to be a party to that contract, the amount of any chargeable gain or allowable loss which would have been treated as accruing to the company on the assumption—
(a) that it had made a disposal of the asset immediately before the beginning of the second accounting period, and
(b) that the disposal had been for a consideration equal to the value (if any) given to the relevant contract in the accounts of the company at the end of the first accounting period.
(6) For the purposes of this paragraph an asset is a chargeable asset if any gain accruing on the disposal of the asset by the company would be a chargeable gain for the purposes of the Taxation of Chargeable Gains Act 1992 (and includes any obligations under futures contracts which, by virtue of section 143 of that Act, are regarded as assets to the disposal of which that Act applies).
38 (1) Where any profits or losses arising to an investment trust from a derivative contract for an accounting period are carried to or sustained by a capital reserve in accordance with the Statement of Recommended Practice used for the accounting period, those profits and losses must not be brought into account as credits or debits for the purposes of this Schedule, notwithstanding paragraph 15.
(2) Where any profits or losses arising to a venture capital trust from a derivative contract for an accounting period—
(a) are carried to or sustained by a capital reserve in accordance with the Statement of Recommended Practice used for the accounting period as if the venture capital trust were an investment trust, or
(b) would be carried to or sustained by a capital reserve if the venture capital trust were an investment trust and were using that Statement of Recommended Practice,
those profits and losses must not be brought into account as credits or debits for the purposes of this Schedule, notwithstanding paragraph 15.
(3) For the purposes of this paragraph, the “Statement of Recommended Practice” used for an accounting period is—
(a) in relation to any accounting period for which it is permitted to be used, the Statement of Recommended Practice relating to Investment Trust Companies issued by the Association of Investment Trust Companies in December 1995, as from time to time modified, amended or revised, or
(b) in relation to any accounting period for which it is permitted to be used, any subsequent statement of recommended practice relating to investment trusts, as from time to time modified, amended or revised.
39 (1) For the purpose of determining whether a company may be approved for the purposes of section 842 of the Taxes Act 1988 (investment trusts) for any accounting period, the excess of any relevant credits arising in that period over any relevant debits so arising shall be treated for the purposes of that section as income derived from shares or securities.
(2) For the purposes of this paragraph “relevant credits” and “relevant debits”, in relation to an accounting period, are credits and debits which are brought into account in respect of that period by virtue of paragraph 14(3) as if they were non-trading credits and non-trading debits falling to be brought into account for the purposes of Chapter 2 of Part 4 of the Finance Act 1996 (c. 8) in respect of loan relationships of the company.
40 (1) For the purpose of determining whether a company may be approved for the purposes of section 842AA of the Taxes Act 1988 (venture capital trusts) for any accounting period, the excess of any relevant credits arising in that period over any relevant debits so arising shall be treated for the purposes of that section as income derived from shares or securities.
(2) For the purposes of this paragraph “relevant credits” and “relevant debits”, in relation to an accounting period, are credits and debits which are brought into account in respect of that period by virtue of paragraph 14(3) as if they were non-trading credits and non-trading debits falling to be brought into account for the purposes of Chapter 2 of Part 4 of the Finance Act 1996 in respect of loan relationships of the company.
41 (1) This Schedule shall apply in relation to insurance and mutual trading companies as it applies in relation to other companies.
(2) Sub-paragraph (1) is subject to paragraphs 42 and 43.
42 (1) Part 1 of Schedule 11 to the Finance Act 1996 (c. 8) (special provision with respect to loan relationships for insurance companies) shall have effect (subject to sub-paragraphs (2) to (4)) in relation to derivative contracts as it has effect in relation to loan relationships.
(2) Any provision of that Part of that Schedule which applies only to debtor relationships (within the meaning of Chapter 2 of Part 4 of that Act) shall not have effect in relation to derivative contracts for the purposes of sub-paragraph (1).
(3) That Part of that Schedule shall have effect in its application in relation to derivative contracts as if—
(a) references to Chapter 2 of Part 4 of the Finance Act 1996 were references to this Schedule,
(b) references to section 80(5) of that Act were references to paragraph 1(2) of this Schedule,
(c) references to section 82(2) of that Act were references to paragraph 14(2) of this Schedule, and
(d) references to credits and debits given in respect of a loan relationship by Chapter 2 of Part 4 of that Act were references, respectively, to the credits and debits given in respect of a derivative contract by this Schedule.
(4) In the application of that Part of that Schedule in the case of any contract of an insurance company—
(a) which is a derivative contract by virtue of paragraph 5, and
(b) to which the insurance company is party for the purposes of any life assurance business, or any category of life assurance business, carried on by it or partly for those purposes,
any credits or debits given in respect of the contract shall not, to the extent that they are referable to that business or any category of that business, be brought into account in accordance with that Schedule as it has effect by virtue of this paragraph (and accordingly the provisions applicable apart from this Schedule shall, to that extent, apply for the purposes of computing the profits of an insurance company for the purposes of corporation tax).
43 (1) This paragraph applies in relation to any contract of a mutual trading company—
(a) which is a derivative contract by virtue of paragraph 5, and
(b) to which the mutual trading company is party, at any time in an accounting period, for the purposes of any non-life mutual business carried on by it or partly for those purposes.
(2) Where this paragraph applies in relation to a contract, this Schedule shall have effect in relation to the contract subject to sub-paragraph (3).
(3) To the extent that the credits or debits which, but for this sub-paragraph, fall to be brought into account in respect of the contract for that period are referable to any non-life mutual business they shall not be brought into account under this Schedule.
(4) The extent to which any credits or debits are referable to the purposes of any non-life mutual business or to other purposes shall be determined by apportioning those credits and debits on a just and reasonable basis.
44 (1) This paragraph applies where—
(a) a company is party to a relevant contract which is a derivative contract by virtue of paragraph 5 (contracts entered into or acquired by a company for the purposes of a trade carried on by it), and
(b) the purposes for which the company entered into or acquired the relevant contract cease at any time (“the relevant time”) to be the company’s purposes in relation to that relevant contract, but
(c) the company continues to be party to the relevant contract after the relevant time.
(2) Where this paragraph applies, the company shall be deemed—
(a) to have disposed of the relevant contract immediately before the relevant time for a consideration of an amount equal to the fair value of the contract at the relevant time, and
(b) to have reacquired it immediately after that time for the same consideration.
45 (1) This paragraph applies where a relevant contract of a company—
(a) whose underlying subject matter consists, or is treated as consisting, wholly of—
(i) shares in a company,
(ii) rights of a unit holder under a unit trust scheme, or
(iii) assets representing a loan relationship to which either section 92 or 93 of the Finance Act 1996 (c. 8) applies,
(b) which is a chargeable asset, and
(c) which was entered into or acquired by the company otherwise than for the purposes of a trade carried on by it,
is at any time appropriated by the company for the purposes of a trade carried on by it.
(2) Where this paragraph applies—
(a) section 161 of the Taxation of Chargeable Gains Act 1992 (c. 12) (appropriations to and from stock) shall have effect in relation to the appropriation of that contract, but
(b) the company may not make an election under subsection (3) of that section in relation to that appropriation.
(3) For the purposes of this paragraph an asset is a chargeable asset if any gain accruing on the disposal of the asset by the company would be a chargeable gain for the purposes of the Taxation of Chargeable Gains Act 1992 (and includes any obligations under futures contracts which, by virtue of section 143 of that Act, are regarded as assets to the disposal of which that Act applies).
(4) Paragraph 9 applies for the purpose of determining whether the underlying subject matter of a relevant contract is to be treated as consisting wholly of the property referred to in sub-paragraph (1)(a).
46 (1) This paragraph applies to a relevant contract of a company—
(a) which is an option or future,
(b) which satisfies the requirements of paragraph 3 (accounting requirements etc), and
(c) whose underlying subject matter falls within sub-paragraph (2).
(2) The underlying subject matter of a relevant contract falls within this sub-paragraph if it consists of—
(a) any one or more of the excluded types of property falling within paragraphs (a) to (f) of sub-paragraph (2) of paragraph 4, and
(b) underlying subject matter other than that referred to in paragraph (a).
(3) Where this paragraph applies to a relevant contract of a company, it shall be treated for the purposes of the Corporation Tax Acts as if it were two separate contracts, namely—
(a) a relevant contract of the company whose underlying subject matter consists of the excluded types of property referred to in sub-paragraph (2)(a), and
(b) a relevant contract of the company whose underlying subject matter consists of the underlying subject matter referred to in sub-paragraph (2)(b).
(4) For the purposes of giving effect to sub-paragraph (3) all such apportionments as are just and reasonable shall be made.
(5) This paragraph does not apply to a relevant contract if it is determined in accordance with paragraph 9 that the underlying subject matter of the relevant contract in question is to be treated as consisting wholly of any one or more of the excluded types of property referred to in sub-paragraph (2)(a).
47 (1) This paragraph applies to a relevant contract of a company—
(a) which is an option or future,
(b) which satisfies the requirements of paragraph 3 (accounting requirements etc), and
(c) whose underlying subject matter falls within sub-paragraph (2).
(2) The underlying subject matter of the relevant contract falls within this sub-paragraph if it consists, or is treated as consisting, wholly of—
(a) any one or more of the excluded types of property falling within paragraphs (a) to (c) of sub-paragraph (2) of paragraph 4, and
(b) any one or more of the excluded types of property falling within paragraphs (d) to (f) of that sub-paragraph.
(3) Where this paragraph applies to a relevant contract of a company, it shall be treated for the purposes of the Corporation Tax Acts as if it were two separate contracts, namely—
(a) a relevant contract of the company whose underlying subject matter consists of the excluded types of property referred to in sub-paragraph (2)(a), and
(b) a relevant contract of the company whose underlying subject matter consists of the excluded types of property referred to in sub-paragraph (2)(b).
(4) For the purposes of giving effect to sub-paragraph (3) all such apportionments as are just and reasonable shall be made.
(5) Paragraph 9 applies for the purpose of determining whether the underlying subject matter of a relevant contract is to be treated as consisting wholly of the excluded types of property referred to in paragraphs (a) and (b) of sub-paragraph (2).
(6) If a relevant contract of a company is one to which this paragraph applies in consequence of the application of paragraph 9 (as described in sub-paragraph (5)), any underlying subject matter of the contract which is subordinate or of small value and which is disregarded in accordance with that paragraph shall be apportioned in accordance with sub-paragraph (4).
But if and so far as the underlying subject matter of a relevant contract is disregarded in accordance with paragraph 9 by reason of being subordinate in relation to such property as is referred to in paragraph (a) or, as the case may be, paragraph (b) of sub-paragraph (3), it shall be apportioned accordingly.
(7) This paragraph does not apply to a relevant contract if it is determined in accordance with paragraph 9 that the underlying subject matter of the relevant contract in question is to be treated as consisting wholly of—
(a) any one or more of the excluded types of property falling within paragraphs (a) to (c) of sub-paragraph (2) of paragraph 4, or
(b) any one or more of the excluded types of property falling within paragraphs (d) to (f) of that sub-paragraph.
48 (1) This paragraph applies to a relevant contract of a company if it would, but for an election under this paragraph, be a derivative contract to which paragraph 7 applies.
(2) Where this paragraph applies to a relevant contract of a company, the company may elect that its relevant contract shall be treated for the purposes of the Corporation Tax Acts as if it were—
(a) a creditor relationship of the company which is a relevant zero coupon bond, and
(b) an option of the company whose underlying subject matter is the same as the underlying subject matter of the relevant contract to which this paragraph applies.
(3) For the purposes of sub-paragraph (2) a relevant zero coupon bond is a zero coupon bond—
(a) issued at the time when the consideration for entering into, or acquiring, the relevant contract to which this paragraph applies was payable by the company,
(b) falling to be redeemed—
(i) on the date on which that relevant contract falls to be performed, or
(ii) in a case where that relevant contract may fall to be performed on more than one date, on the date which is the last of those dates, and
(c) issued at a price equal to the amount that would have been the market value of a zero coupon bond—
(i) issued at that time,
(ii) falling to be redeemed on that date or, as the case may be, on that last date, and
(iii) producing, by the time of its redemption, an amount equal to the amount which is the guaranteed amount in relation to that relevant contract.
(4) The only accounting method authorised for the purposes of Chapter 2 of Part 4 of the Finance Act 1996 (c. 8) for use by a company as respects a creditor relationship arising under sub-paragraph (2)(a) shall be an authorised mark to market basis of accounting.
(5) None of paragraphs 6 to 8 shall apply to an option arising under paragraph (2)(b).
(6) For the purposes of giving effect to sub-paragraph (2) all such apportionments as are just and reasonable shall be made.
(7) An election under sub-paragraph (2) in relation to a relevant contract—
(a) may only be made within the period of two years following the end of the company’s first accounting period in which it is party to the relevant contract;
(b) has effect for that accounting period and all subsequent accounting periods of the company; and
(c) is irrevocable.
(8) For the purposes of this paragraph a “zero coupon bond” is a security—
(a) whose issue price is less than the amount payable on redemption, and
(b) which does not provide for any amount to be payable by way of interest.
(9) For the purposes of this paragraph “market value” has the same meaning as in the Taxation of Chargeable Gains Act 1992 (c. 12).
Finance Act 2002