Annex 1: Minor Changes in the Law Change 65: Derivative contracts: credits and debits in respect of capital expenditure: debits not to be brought into account: section 604
This change clarifies the rule that prevents certain debits in respect of a derivative contract taken to profit and loss being brought into account under Part 7 of this Act. The rule applies if a related debit has already been brought into account under that Part notwithstanding that it was treated as capital expenditure under generally accepted accounting practice.
Paragraph 17A of Schedule 26 to FA 2002 sets out the general rule that the amounts to be brought into account by a company for the purposes of that Schedule are those that, in accordance with generally accepted accounting practice, are recognised in determining the company’s profit or loss for the accounting period in question. Paragraph 17B of that Schedule provides that amounts so “recognised” are those recognised for accounting purposes in certain accounts or statements of the company.
Paragraph 25 of Schedule 26 to FA 2002 varies the general rule for a credit or debit that is treated in the company’s accounts as an amount brought into account in determining the value of a fixed capital asset or project. A credit or debit so treated falls outside the meaning of amounts recognised in determining the company’s profit or loss for the period. Paragraph 25 of Schedule 26 to FA 2002 provides that, notwithstanding the accounting treatment, the credit or debit is brought into account in the same way as a credit or debit to which paragraph 17A of Schedule 26 to FA 2002 refers. (There is an exception for certain debits taken into account under Schedule 29 to FA 2002 (intangible fixed assets)).
If a company decides to write down the value of the asset to which a debit within this paragraph has been added, or to create a reserve for the amortisation or depreciation of that asset, a debit will be taken to profit and loss. Such a debit would, but for the prohibition in paragraph 25(4) of Schedule 26 to FA 2002, be brought into account in the same way as credits and debits to which paragraph 17A of Schedule 26 to FA 2002 refers.
Paragraph 25 of Schedule 26 to FA 2002 matches paragraph 14 of Schedule 9 to FA 1996. Paragraph 25(4) and paragraph 14(4) were inserted in identical terms by Schedule 10 to FA 2004 (see paragraphs 56 and 33 respectively of that Schedule). A debit in respect of the writing down of the asset, or the creation of an amortisation or depreciation reserve, is not brought into account under Schedule 26 to FA 2002 (or Chapter 2 of Part 4 of FA 1996 in the case of a loan relationship) if attributable to the debit that is brought into account by the main rule in paragraph 25 of Schedule 26 to FA 2002 (paragraph 14 of Schedule 9 to FA 1996 in the case of a loan relationship). But the wording of paragraph 25(4)(b), in so far as it refers to “the interest component of the asset”, has no application to the regime for derivative contracts. Such interest is only taken into account under the regime for loan relationships in Chapter 2 of Part 4 of FA 1996. The change dispenses with the redundant words to leave the rule in terms appropriate to derivative contracts.
This change amends the scope of a rule prohibiting a deduction. Whether that amendment results in further disallowance or an easing of disallowance (or any difference) depends largely on how the company in question interpreted the provision in assessing its liabilities. In practice, it is likely to have no tax effect.
This change is in principle and in practice adverse to some taxpayers and favourable to others. But the numbers affected and the amounts involved are likely to be small.