Annex 1: Minor Changes in the Law Change 57: Loan relationships etc: amortised cost basis and connected companies: fair value to apply in the case of reset bonds and shares with guaranteed returns: sections 349 and 534
This change gives precedence to fair value accounting where a reset bond or a share which is an interest-like investment would normally attract the amortised cost basis of accounting as a result of the connected companies provisions.
Section 87(2) of FA 1996 requires debits and credits on a loan relationship to be accounted for on an amortised costs basis where there is a connection between the creditor and debtor company. This is rewritten in section 349.
Sections 88A(4) of FA 1996 requires debits and credits on a loan relationship where the rate of interest is reset to be determined on the basis of fair value accounting (rewritten in section 454). Sections 91A(3) and 91B(3) of FA 1996 (rewritten in section 534) also require credits to be determined on the basis of fair value accounting where shares with interest-like returns are treated as loan relationships.
This change gives precedence to the fair value basis where a conflict between the two methods of accounting arises, the more specific rule taking precedence over the more general rule.
The tax effect will depend on the circumstances of the taxpayer and the effects of fair value accounting on the loan relationship or deemed loan relationship.
This change is in principle adverse to some taxpayers and favourable to others. But it is expected to have no practical effect as it is in line with generally accepted practice.