Annex 1: Minor Changes in the Law Change 66: Derivative contracts: priority of provisions when a company ceases to be UK resident and ceases to be a member of a group: sections 609 and 610
This change deals with the deemed assignment and reacquisition of rights and liabilities under a derivative contract on a company ceasing to be UK resident, or the rights and liabilities in question ceasing to be held for the purposes of a permanent establishment in the United Kingdom of a non-UK resident company. The deeming does not apply if such a deemed assignment and reacquisition would otherwise occur at the same time as the company leaves a group after replacing another group member as a party to the contract. It corrects a mismatch between the rules for derivative contracts and those for loan relationships as they deal with the same circumstances.
Paragraph 22A of Schedule 26 to FA 2002 applies if a company ceases to be resident in the United Kingdom or rights and liabilities under a derivative contract of a non-UK resident company cease to be held or owed for the purposes of a United Kingdom permanent establishment. In either case, the company is deemed to have assigned the rights and liabilities under its derivative contracts (or those no longer so held or owed) for a consideration equal to the fair value of the rights and liabilities, and to have reacquired them for the same amount. Paragraph 22A of Schedule 26 to FA 2002 is rewritten in sections 609 and 610 of this Act.
Paragraph 30A of Schedule 26 to FA 2002 deems the same assignment and reacquisition to occur, in respect of a derivative contract, if either of two circumstances applies after one member of a group has replaced another as a party to that contract, as a result of a transaction or series of transactions within paragraph 28(2)(a) or (b) of Schedule 26 to FA 2002, so as to trigger paragraph 28(3) of that Schedule. The circumstances are that the transferee company ceases to be a member of that group of companies either, firstly, solely because of an “exempt distribution”, that is, a distribution that is exempt by virtue of section 213(2) of ICTA (demergers), or, second, for any other reason. In the first case, the deemed assignment and reacquisition is triggered by and at the time of a “chargeable payment” within the meaning of section 214(2) of ICTA within five years of the company leaving the group. In the second case, the deemed assignment and reacquisition occur when the company leaves the group. Paragraph 30A of Schedule 26 to FA 2002 is rewritten in sections 630 to 632 of this Act.
Paragraph 10A of Schedule 9 to FA 1996, rewritten in sections 333 and 334 of this Act, is the equivalent for loan relationships of paragraph 22A of Schedule 26 to FA 2002. Paragraph 12A of Schedule 9 to FA 1996, rewritten in sections 344 to 346 of this Act, is the equivalent for loan relationships of paragraph 30A of Schedule 26 to FA 2002.
Both paragraph 22A and paragraph 30A of Schedule 26 to FA 2002 may apply at the same time (for example, a company may cease to be UK resident at the time it ceases to be a member of the group because it moves its residence abroad on being bought by a new parent who is non-UK resident). Paragraph 10A(1A) of Schedule 9 to FA 1996 avoids the same duplication in respect of loan relationships by disapplying that paragraph if paragraph 12A of that Schedule applies and the cessation mentioned in one paragraph occurs at the same time as the cessation mentioned in the other.
There is no reason for the two regimes to apply different rules in these circumstances. Sections 609 and 610 therefore include the equivalent of paragraph 10A(1A) of Schedule 9 to FA 1996, mirroring the rewrite of that provision in sections 333 and 334. This change brings the two regimes into line.
This change clarifies the order of priority of the operation of the provisions in question. It may, in cases where section 631 or 632 applies instead of section 609 or 610, defer the point at which the deemed assignment and reacquisition, and therefore the resulting incidence of a tax charge, occurs.
This change is in taxpayers’ favour in principle and may benefit some in practice. But the numbers affected and the amounts involved are likely to be small.