Corporate loan relationship changes: HMRC consultation begins

Corporate loan relationship changes: HMRC consultation begins

Mon 26 Oct 2015

HMRC have released four sets of draft regulations for informal consultation in connection with the modernisation of corporate debt and derivatives programme.

These draft regulations will amend the four existing regulations listed here, which support the primary legislation regarding the amounts to be recognised for tax purposes in relation to loan relationships and derivative contracts, and the timing of that recognition:

 Exchange gains and losses (bringing into account gains and losses) regulations (SI 2002/1970). The 2002 regulations provide for exchange gains or losses on loans or derivatives which hedge foreign exchange risk from a company’s investment in a foreign enterprise, and which have previously been disregarded for corporation tax purposes, to be taxed when there is a disposal of the hedged asset. The purpose of the amendments is to ensure that the Regulations interact with new s320A and 604A CTA 2009 (in the Summer Finance Bill) so that amounts are not potentially taxed twice.

 Loan relationships and derivative contracts (disregard and bringing into account profits and losses) regulations (SI 2004/3256), more commonly known as the ‘Disregard Regulations’. The purpose of the Disregard Regulations is to allow hedging arrangements to be treated for tax in the same way as they were under SSAP 20, whereby the foreign exchange differences on the loan/ derivative acting as a hedge were not taxed until the underlying asset was disposed of. One change is for Regulation 9A to be repealed (which dealt with designated cash flow hedges) on the basis that the move to tax profits and losses on loan relationships and derivatives on the amounts recognised on the profit and loss account means special rules are no longer needed.

New Regulation 5A of the Disregard Regulations – foreign branches of UK companies – these changes ensure that exchange gains or losses on loans or derivatives as part of a designated fair value hedge are not brought into account on disposal of the foreign operation (in line with the tax treatment of the retranslation amounts in respect of the foreign operations, which are excluded from tax under s328(3) and 606(3) CTA 2009.)

 Loan relationships and derivative contracts (change of accounting practice) regulation (SI 2004/3271). These Regulations alter the amounts brought into account on a change of accounting policy, allowing certain amounts to be spread over ten years and for other specified amounts not to be brought into account at all. The key change here deals with adjustments arising from fluctuations in a company’s credit rating (‘own credit risk’). If a company’s credit worthiness deteriorates, the fair value of its issued debt will go down (or vice versa). Under new accounting standards, such amounts will go to reserves, so would not otherwise be taxed, since the taxation of loan relationships will be driven by what appears in the profit and loss account. Finance (No 2) Act 2015 will tax transitional adjustments over a five year period. This is similarly replicated in the COAP Regulations to ensure that if there is a future change in accounting policy, the five year spreading rule will apply then too.

 Loan relationships and derivative contracts (exchange gains and losses using fair value accounting) regulations (SI 2005/3422). These Regulations provide specific rules for calculating amounts of exchange gains and losses where a loan relationship or derivative contract is measured at fair value or is part of a designated fair value hedge. The amendments are minor to reflect changes to statutory references and terminology.


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