Commentary on Sections Overview Chapter 5: Continuity of treatment on transfers within groups Section 631: Transferee leaving group otherwise than because of exempt distribution
1726.This section deems the transferee within section 625 to have assigned (and immediately reacquired) the rights and liabilities under the derivative contract, immediately before it left the group, for a consideration equal to their fair value at that time. It is based on paragraph 30A(2), (3), (4), (5) and (8) of Schedule 26 to FA 2002.
1727.One of the conditions for this section to apply is that the company ceases to be a member of the group of companies in question for reasons which are not just that it does so because of an “exempt distribution” under section 213(2) of ICTA. That section provides for a distribution arising from the demerger of the trading activities of a single company or group of companies to a number of companies or groups to be disregarded for certain purposes.
1728.The second condition is that a credit would be brought into account under either this Part (condition A in subsection (3)) or Part 5 (loan relationships) (condition B in subsection (4)). The credit in question, as regards this Part, is the credit that would be brought into account under this Part on the deemed assignment under this section of the rights and liabilities under the derivative contract.
1729.As regards Part 5, the credit in question is the credit brought into account under that Part because of section 345(2)(a) and (b) in a case where the transferee has a “hedging relationship” between the derivative contract and a creditor relationship That section makes matching provision for loan relationships to that made by this section for derivative contracts.
1730.In either case, the second condition is not satisfied if the assignment would give rise to a debit. So the section cannot give rise to a reduction of the transferee’s liability to corporation tax.
1731.“Hedging relationship” is described in section 707 in a number of ways. Broadly, these relate to cases where the derivative contract is entered into to shelter the company from risks associated with holding or owing the hedged asset or liability (such as a fluctuation in values because of movement in a relevant market, such as a stock or commodities exchange).