Part 4: Income tax, corporation tax and capital gains tax Section 32 and Schedule 7: Loan relationships and derivative contracts Details of the Schedule Part 2: Derivative contracts: Amendments of Part 7 of CTA 2009
Paragraph 59 introduces amendments to Part 7 of CTA 2009, which sets out rules governing the treatment of derivative contracts.
	Paragraph 60 amends the overview in section 594 to reflect the changes now being made.
	Paragraph 61 inserts new section 594A, which sets out the matters in respect of which amounts are to be brought into account for the purposes of Part 7. These were previously contained in section 595, and remain unchanged. The matters are the profits, losses, interest and expenses arising to a company on its derivative contracts.
	Paragraph 62 makes various changes to section 595, which sets out general principles about the bringing into account of credits and debits. In particular it removes the requirement that credits and debits brought into account should ‘fairly represent’ profits and gains arising from derivative contracts. It provides a new rule for apportionment of amounts where an accounting period of a company does not coincide with a period of accounts.
	Paragraph 63 sets out amendments to section 597 concerning amounts recognised in determining a company's profit or loss. It establishes that this is now to be based on amounts recognised in the accounts as items of profit or loss. New subsection (1A) makes clear that this includes amounts that were previously recognised in other comprehensive income and which are subsequently transferred to profit or loss.
	Paragraph 64 makes a consequential change to section 599B to reflect the concept of ‘tax adjusted carrying value’ in new section 702, introduced by paragraph 96.
	Paragraph 65 makes various amendments to section 604, concerning credits and debits in respect of profits and losses from derivative contracts that are capitalised in the carrying value of an asset or liability. In particular, this section may apply where amounts in respect of a designated cash flow hedge are recognised in the carrying value of an asset or liability. The changes serve to clarify that the scope of the provisions is restricted to cases where amounts would not otherwise be brought into account.
	Paragraph 66 inserts new section 604A concerning amounts recognised in other comprehensive income and not transferred to profit or loss. This determines the treatment when a derivative contract, or part of a derivative contract, ceases to be recognised in company accounts. Together with new subsection 597(1A) inserted by paragraph 63, this ensures that all amounts recognised as items of other comprehensive income will be brought into account at some point. Subsection (4) provides that these amounts are to be brought into account in the same way as amounts recognised in determining the company’s profit or loss for the period, making clear that the amounts are subject to all the provisions of Part 7. Subsections (6) and (7) provide that in determining any such amounts for a particular period it is necessary to assume that relevant accounting policies applied in that period were also applied in the past, which is the approach accounting standards normally take.  There is an exception to this - if in drawing up the accounts for the period in question some other assumption regarding accounting policies followed in the past was made, that assumption should be followed for tax purposes.  This could arise if a new accounting standard prescribed a particular approach on first adoption, for example.
	Paragraph 67 omits section 605 concerning credits and debits recognised in equity. Amounts recognised directly in equity will no longer normally be brought into account under Part 7.
	Paragraph 68 makes a series of changes to section 606 concerning exchange gains and losses. It clarifies that amounts arising on the retranslation of a business from its functional currency into a different currency are not profits or losses within Part 7. It provides a power to make regulations concerning the exclusion or inclusion of exchange gains and losses with respect to the Part 7 rules.
	Paragraph 69 omits sections 606A to 606H, which are superseded by the anti-avoidance provisions introduced by paragraph 94.
	Paragraph 70 amends references to sections in section 607.
	Paragraph 71 inserts new sections 607A, 607B and 607C.
	New section 607A provides that where, in certain circumstances, a company recognises amounts in its accounts in respect of a derivative contract to which it is not legally a party, it is treated as if it were a party. The section applies where a company has ceased to be, or has yet to become, party to a derivative contract, or where the risks and rewards of a derivative contract have been transferred.
	New sections 607B and 607C ensure that the rule in section 607A will not lead to, respectively, double relief or double taxation where another company also brings into account debits or credits in respect of the same derivative contract.
	Paragraph 72 omits section 608 concerning companies ceasing to be party to derivative contracts. These provisions are superseded by new section 607A.
	Paragraph 75 makes a series of amendments to section 613 concerning adjustments on change of accounting policy. These changes extend the scope of sections 614 and 615 to apply where a company’s basis of accounting is altered as a result of the application of tax statute.
	Paragraph 76 substitutes a new section 614, clarifying rules for determining credits or debits to be brought into account in cases where there is a change of accounting practice involving changes in the tax-adjusted carrying value of a derivative contract.
	Paragraph 77 amends section 615 concerning changes of accounting policy after a company ceases to be party to a derivative contract. It clarifies the credits or debits to be brought into account and aligns the rules with their equivalents in Part 5. Subsection (5) updates the definition of ‘the amount outstanding in respect of the derivative contract’ to take account of the changes to section 597 introduced by paragraph 63; the definition now includes amounts recognised in other comprehensive income. New subsections (7) and (8) provide that in determining any such amounts for a particular period it is necessary to assume that relevant accounting policies applied in that period were also applied in the past, which is the approach accounting standards normally take.  There is an exception to this - if in drawing up the accounts for the period in question some other assumption regarding accounting policies followed in the past was made, that assumption should be followed for tax purposes.  This could arise if a new accounting standard prescribed a particular approach on first adoption, for example.
	Paragraphs 78 to 79 and 81 to 88 make a series of consequential amendments to sections 622, 625, 653, 654, 658, 666, 671, 673, 675 and 684. In each case these amendments substitute ‘tax-adjusted carrying value’ (now defined in section 702) for ‘carrying value’.
	Paragraph 80 omits section 629, which is superseded by the anti-avoidance provisions introduced by paragraph 94.
	Paragraph 90 amends section 690 concerning derivative contracts held for unallowable purposes. It provides clarification on the scope of the debits that a company may not bring into account in cases where a debit is incorporated within a credit.
	Paragraph 91 amends section 691 concerning the meaning of ‘unallowable purpose’. It ensures that the meaning of ‘related transaction’ includes, for the purposes of this section, anything which in substance equates to a related transaction.
	Paragraph 92 makes amendments to section 692, concerning allowance of accumulated net losses, to ensure that debits with an unallowable purpose restricted under section 690 can only be set against credits attributable to the same unallowable purpose.
	Paragraph 93 omits section 698, which is superseded by the anti-avoidance provisions introduced by paragraph 94.
	Paragraph 94 inserts new sections 698B, 698C and 698D, which counter tax avoidance.
	New section 698B provides a new anti-avoidance rule to counteract ‘derivative-related tax advantages’ arising from ‘relevant avoidance arrangements’, by way of just and reasonable adjustments to credits and debits under Part 7.
	New section 698C defines ‘relevant avoidance arrangements’. Subsection (4) excludes from that definition arrangements aimed at obtaining tax advantages which can reasonably be assumed to have been intended under the derivative contracts legislation. Subsection (5) defines a ‘derivative-related tax advantage’ in terms of credits and debits under Part 7.
	New section 698D gives, in subsection (1), non-exhaustive examples of results which might indicate that the exclusion from the definition of relevant avoidance arrangements in section 698C(4) should not apply. Subsection (2) ensures that the examples in subsection (1) are only relevant to the availability of the section 698C(4) exclusion if it is reasonable to assume that the result in question was not the anticipated outcome when any provisions of Part 7 engaged by the arrangements were enacted.
	Paragraph 95 substitutes a new section 702, defining ‘tax-adjusted carrying value’. The definition is based on the carrying value in the company’s accounts, adjusted as a result of particular statutory provisions. The references in subsection (6) to section 597 and section 604A ensure that the carrying value is adjusted for amounts that have previously been recognised as items of other comprehensive income, representing amounts that will be brought into account in the future. Subsections (4) and (5) provide that in determining any such amounts for a particular period it is necessary to assume that relevant accounting policies applied in that period were also applied in the past, which is the approach accounting standards normally take.  There is an exception to this - if in drawing up the accounts for the period in question some other assumption regarding accounting policies followed in the past was made, that assumption should be followed for tax purposes.  This could arise if a new accounting standard prescribed a particular approach on first adoption, for example.
	Paragraph 96 provides an amendment to section 705.
	Paragraph 97 provides consequential amendments to section 710.