Loan relationships and derivative contracts: anti-avoidance
Legislation will be introduced in Finance Bill 2010 to tackle schemes which involve the derecognition of loan relationships and derivative contracts for accounting purposes. In such schemes, profits and losses in respect of the loan or derivative no longer arise for accounting purposes post derecognition and are, therefore, not brought into account for tax purposes.
There are currently anti-avoidance rules in place (section 311-312 Part 5 Corporation Tax Act 2009 for loan relationships and section 599A and B Part 7 Corporation Tax Act 2009 for derivative contracts) which are designed to override the accounting treatment in certain circumstances. These require profits and losses to be brought into account for tax purposes as though the relevant loan or derivative had continued to be fully recognised.
The new measures will extend the scope of these anti-avoidance rules to apply where derecognition arises as a result of the acquisition or variation of a capital interest in a company, partnership or trust, or where derecognition is triggered by an event that occurs in a later accounting period to that in which the derecognition takes place.
Additionally, a technical note is to be issued in early July 2010 setting out proposals for more general anti-avoidance legislation to tackle avoidance schemes involving derecognition.
Who will be affected?
Those companies which have entered (or may enter) into such derecognition arrangements involving loan relationships or derivative contracts, where profits and losses would arise on the loan or derivative for accounting purposes (and for tax purposes) absent the derecognition.
The new legislation will be introduced in Finance Bill No.2 2010 and will have effect for credits and debits arising on such loans or derivatives on or after 22 June 2010.
HMRC continue to respond to avoidance schemes disclosed to them under the disclosure rules. The extension of the existing rules to counter such schemes is, therefore, not unexpected. The additional generic proposals to be announced in July 2010 are likely to seek to block new attempts to circumvent the measures.