Part 4: Income tax, corporation tax and capital gains tax Section 32 and Schedule 7: Loan relationships and derivative contracts Background note
At Budget 2013, the government announced a review of the corporation tax rules governing corporate debt (or ‘loan relationships’) and derivative contracts. There was consultation on a wide-ranging package of measures to update and simplify these regimes and to reduce their susceptibility to tax avoidance.
	The rules for the taxation of loan relationships, now contained in Part 5 of CTA 2009, date from 1996. A similar but standalone regime for derivative contracts, contained in Part 7, was introduced in 2002. Parts 5 and 7 are based on the concept of deriving taxable profits and losses on these instruments from accounting entries. They do however incorporate some highly complex features, particularly around debt held between connected companies and within groups. The government has in the past frequently received adverse comment on the complexity of the current rules. The regimes for both loan relationships and derivative contracts have developed significantly over time, evolving in response to emerging avoidance risks and to changes in commercial and accounting practice.
	Accountancy standards, on which the tax rules are based, have not remained static. Standard setters for both UK GAAP and International Financial Reporting Standards (IFRS) have made significant changes to the accounting treatment of financial instruments. New UK GAAP and IFRS standards have recently been issued (including IFRS 9 in 2014) which will be adopted over coming years, and which should cement the accounting treatment of financial instruments for some time to come.
	Historically, the complexity in the loan relationships and derivative contracts regimes has provided repeated opportunities for tax avoidance. Reactive measures to counter this avoidance have contributed to further complexity and to some loss of structural clarity in the regime, tending to leave further potential loopholes. This growing complexity has increased compliance costs for some businesses and has made it difficult in some cases for compliant groups and companies to be certain about tax treatments.
	The changes now being made address areas which have given difficulty in the past, reduce complexity and provide enhanced protection against tax avoidance, while retaining the fundamental structure and principles of the regimes.