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 1: Loan relationships: Amendments of Parts 5 and 6 of CTA 2009
Part 1 of the Schedule makes changes to Parts 5 and 6 of CTA 2009, which sets out rules governing the treatment of loan relationships. Paragraph 1 introduces the changes to Part 5.
	Paragraph 2 makes changes to the overview in section 306 to reflect the amendments now being made.
	Paragraph 3 inserts new section 306A, which sets out the matters in respect of which amounts are to be brought into account for the purposes of Part 5. These were previously contained in section 307, and are unchanged. The matters are profits, losses, interest and expenses arising to a company on its loan relationships.
	Paragraph 4 makes various changes to section 307, 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 loan relationships. 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 5 sets out amendments to section 308 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 6 makes consequential amendments section 310 which contains a regulation-making power to allow certain amounts to be excluded from being brought into account.
	Paragraph 7 makes various amendments to section 313 concerning the bases of accounting in accordance with which amounts may be brought into account for tax purposes. The definition of an amortised cost basis of accounting is aligned with accountancy, and adjustments under a designated fair value hedge are permitted. The definition of ‘fair value accounting’ is aligned with accounting treatment where an instrument is measured at fair value through profit or loss.
	Paragraph 8 amends the heading before section 315 to reflect the wider amendments made.
	Paragraphs 9 to 12 are concerned with situations where a company changes the basis of accounting on which it calculates credits and debits under Part 5. Paragraph 9 makes a series of amendments to section 315. These extend the scope of sections 316 and 318 to apply where a company alters its basis of accounting to comply with tax rules. An example of such a rule is section 349, which requires the application of an amortised cost basis of accounting to connected companies relationships.
	Paragraph 10 substitutes a new section 316, clarifying rules for determining the credit or debit to be brought into account in cases where there is a change in the tax-adjusted carrying value of a loan relationship, and aligning the rules with equivalent provisions in Part 7 of CTA 2009.
	Paragraph 11 omits section 317 concerning carrying values. This is now replaced by the new section 465B.
	Paragraph 12 amends section 318 concerning changes of accounting policy following cessation of a loan relationship, clarifying credits or debits to be brought into account and aligning the rules with equivalent provisions in Part 7 of CTA 2009. Subsection (5) updates the definition of ‘the amount outstanding in respect of the loan relationship’ to take account of the changes to section 308 introduced by paragraph 5; 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.
	Paragraph 13 amends section 320, concerning credits and debits in respect of profits and losses from loan relationships that are capitalised in the carrying value of an asset or liability. In particular, this section may apply where borrowing costs are capitalised under Section 25 of Financial Reporting Standard 102 or under International Accounting Standard 23. The changes clarify that the provisions only apply where amounts would not otherwise be brought into account.
	Paragraph 14 inserts new section 320A, setting out the treatment of amounts recognised in other comprehensive income and not transferred to profit or loss when a loan relationship, or part of a loan relationship, ceases to be recognised in a company’s accounts. Together with new subsection 308(1A), inserted by paragraph 5, 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 5. 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 15 omits section 321 concerning credits and debits recognised in equity. Amounts recognised directly in equity will no longer normally be brought into account under Part 5.
	Paragraph 16 amends section 322, which exempts credits arising in certain cases where a debt is released. It inserts a new subsection (5B) which exempts credits arising on releases where there is a material risk that within 12 months of the release the company would be unable to pay its debts. That is, where the debtor is in significant financial difficulty.
	Paragraph 17 amends section 323 to explain what is meant by ‘unable to pay its debts’. Broadly, the exemption applies where a debtor company is in significant financial distress.
	Paragraph 18 inserts new section 323A. This applies where a company's debt is substantially modified or replaced, and there is a material risk that the company will within 12 months be unable to pay its debts. In these circumstances, it is not required to bring credits into account in respect of the modification or replacement. Any subsequent reversal is not brought into account as a debit. Like new subsection 322(5B), the exemption is intended to apply where a debtor company is in significant financial distress.
	Paragraph 19 inserts new subsection 324(3A) to clarify that credits and debits in respect of valuation changes in respect of hedged assets and liabilities are not excluded.
	Paragraph 20 makes a series of changes to section 328 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 5. It extends the power to make regulations concerning the exclusion or inclusion of exchange gains and losses from or in the Part 5 rules.
	Paragraph 21 omits sections 328A to 328H, which are superseded by the anti-avoidance provisions introduced by paragraph 51.
	Paragraph 22 substitutes references to sections in section 329.
	Paragraph 23 inserts new sections 330A, 330B and 330C.
	New section 330A provides that where a company recognises amounts in its accounts in respect of a loan relationship 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 loan, or where the risks and rewards of a loan have been transferred.
	New sections 330B and 330C ensure that the rule in section 330A 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 loan.
	Paragraph 24 omits sections 331 and 332, concerned with companies ceasing to be a party to loan relationship. These provisions are superseded by new section 330A.
	Paragraphs 25 and 26 make minor adjustments to sections 340 and 342, concerning transfers of loan relationships within groups, to reflect changes elsewhere.
	Paragraph 27 omits section 347, which is superseded by the anti-avoidance provisions introduced by paragraph 51.
	Paragraph 28 amends section 349, concerning the application of amortised cost basis to connected companies relationships. It inserts a new subsection (2A) which provides rules for cases involving certain hedging instruments where the company adopts fair value accounting.
	Paragraph 29 omits sections 350 (companies beginning to be connected) and 351 (companies ceasing to be connected). These are now obsolete following the changes to section 315.
	Paragraph 30 amends section 352, which excludes credits and debits from tax where there is a related transaction involving a connected company loan relationship. It ensures that credits and debits are not prevented from being brought into account by the operation of section 352 where those amounts are attributable to interest rate movements on an arm’s length borrowing.
	Paragraph 31 inserts new section 352A, which is concerned with situations where debits brought into account by a company are reduced as a result of section 352. In these circumstances no credit is subsequently brought into account to the extent that it represents a reversal of a loss which gave rise to the reduction of debits.
	Paragraphs 32 and 33 amend sections 354 (exclusion of debits for impaired or released connected company debts) and 358 (exclusion of credits on release of connected company debts). They provide rules for clawing back amounts previously recognised by the company in respect of a designated fair value hedge in cases where the debt is released.
	Paragraph 34 makes minor consequential amendments to section 359 (Exclusion of credits on release of connected companies’ debts during creditor's insolvency).
	Paragraphs 35 and 38 make amendments to section 361 and 362 concerning releases of impaired debts between connected companies. The amendments arise in consequence of the introduction of new section 361D and new section 362A by paragraphs 37 and 39. In particular they repeal sections 361A and 361B, which provide exemptions from the provisions on deemed releases under section 361.
	Paragraph 36 omitssections 361A and 361B, which are superseded by new section 361D, inserted by paragraph 37.
	Paragraph 37 inserts new section 361D. This provides an exemption for the credit that arises on a deemed release imposed on a debtor company by section 361 when an impaired debt is acquired by a creditor company connected to the debtor. The exemption applies where there is a material risk that within 12 months of the connected creditor becoming party to the debt, the debtor company would be unable to pay its debts. That is, where the debtor is in significant financial distress, as with the exemptions provided by new sections 322(5B) and 362A, inserted by paragraphs 16 and 39.
	Paragraph 38 makes a consequential amendment to section 362.
	Paragraph 39 inserts new section 362A. This provides an exemption for the credit that arises on a deemed release, which is imposed on a debtor company by section 362 where the parties to an impaired debt become connected.  It applies where the debtor is in significant financial distress, as with the exemptions provided by new sections 322(5B) and 361D, inserted by paragraphs 16 and 37.
	Paragraphs 41 to 45 make minor consequential amendments to sections 422 (Transfer of loan relationship at notional carrying value), 424 (Reorganisations involving loan relationships), 433 (Transfer of loan relationship at notional carrying value), 435 (Reorganisations involving loan relationships) and 440 (Overview of Chapter 15 of Part 5).
	Paragraph 46 amends section 441 concerning loan relationships 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 47 amends section 442 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 48 repeals section 443, which is superseded by the anti-avoidance provisions introduced by paragraph 51.
	Paragraph 50 omits sections 454 and 455, which are superseded by the anti-avoidance provisions introduced by paragraph 51.
	Paragraph 51 inserts new sections 455B, 455C and 455D, which counter tax avoidance.
	New section 455B provides a new anti-avoidance rule to counteract ‘loan-related tax advantages’ arising from ‘relevant avoidance arrangements’, by way of just and reasonable adjustments to credits and debits under Part 5.
	New section 455C 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 loan relationships legislation. Subsection (6) defines a ‘loan-related tax advantage’ in terms of credits and debits under Part 5.
	New section 455D gives, in subsection (1), non-exhaustive examples of results which might indicate that the exclusion from the definition of ‘relevant avoidance arrangements’ in section 455C(4) should not apply. Subsection (2) ensures that the examples in subsection (1) are only relevant to the availability of the section 455C(4) exclusion if it is reasonable to assume that the result in question was not the anticipated outcome when any provisions of Part 5 engaged by the arrangements were enacted.
	Paragraph 52 inserts new section 465B concerning ‘tax adjusted carrying value’. This replaces the previous section 317 (now repealed by paragraph 11) and explains the meaning of this term in the context of loan relationships. It is based on the carrying value in the company’s accounts, adjusted as a result of particular statutory provisions. The reference in subsection (8) of section 465B to section 308(1A) and section 320A ensures that the carrying value is adjusted for amounts that have previously been recognised as items of other comprehensive income, and which represent amounts that will in the future be brought into account. Subsections (5) and (6) 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 53 amends section 475 to broaden the circumstances in which regulations may be made concerning the calculation of exchange gains and losses, by removing their restriction to cases where fair value accounting is used. This follows the change made by paragraph 7 to the definition of fair value accounting in section 313.
	Paragraph 54 inserts new section 475A concerning hedging relationships. This explains the circumstances in which a company has a "hedging relationship".
	Paragraph 55 amends section 476, to introduce definitions of several terms used in the Schedule.
	Paragraph 56 introduces amendments to Part 6 of CTA 2009, which sets out rules governing the treatment of matters to be treated as though they were loan relationships.
	Paragraphs 57 and 58 make consequential adjustments to sections 521F (Shares becoming or ceasing to be shares to which section 521B applies) and 540 (Manufactured interest treated as interest under loan relationship).