“Modernising” the loan relationship rules – HMRC update

“Modernising” the loan relationship rules – HMRC update

Fri 11 Apr 2014

HMRC have published a technical note identifying changes they propose including in FB 2015 and suggested changes that are being dropped. The HMRC note is in general terms, detail is still being worked on, and it does not include any draft legislation.

A fundamental principle of the changes is that tax will be driven by recognition in the profit and loss or income statement.  Under the present rules recognition in any part of the accounts (including reserves or equity) may lead to tax.  This will make provisions in the current rules to either remove or defer the tax charge or relief unnecessary.  HMRC accept that frequently entries in equity are recycled to profit and loss and that the appropriate time to tax effect these items is at the time they hit P&L.  Alongside the new P&L as default rule, provisions may be required to tax or relieve some entries that are never recycled to P&L.

Once IFRS 9 is in final form HMRC will consider whether additional tax rules may be required in view of the likelihood that IFRS 9 will give rise to greater impairment charges.

The good news is that HMRC are dropping their suggestion of introducing an “explicit non-specific provision overriding accounting treatment.”(2.4).  This provoked considerable protest as it would have undermined the key principle of the LR rules that, absent a specific statutory provision, the accounting treatment drives the tax result.  The suggestion of merging the LR and derivative contracts rules will not be taken forward.   Also dropped is the proposal to exclude non-trading foreign exchange differences from tax.

Summer 2014

The move to new UK GAAP in FRS 101/102 will affect accounting recognition of income and expense in relation to some loans and derivatives. There is an intention that the  change of accounting practice and  disregard regulations will be simplified, updated and amended to grandfather exchange movements on instruments which although legally debt are recognised as equity.  The amendments will be published this summer so that the amended regs are in place before companies make the transition to new UK GAAP. (2.18)

Autumn 2014 – draft FB 2015

Recognition in the profit and loss will be the default. An exception may be required for life insurance companies in respect of linked policies. (2.6)

There will be a regime wide anti-avoidance rule. Taxpayers using structured arrangements have deployed arguments using the current rule limiting taxation to amounts that “fairly represent” the profits on loan relationships and derivative contracts.  The new rule, which will be in addition to current anti-avoidance provisions, will apply where there are arrangements aimed primarily at obtaining a tax advantage (2.8)

The rules applying to companies’ interests in partnerships and LLPs will be a transparent regime, treating the corporate member as if it was a party to its share of the loan or derivative.  HMRC are working on the detail, e.g. how to deal with changes in participation in the partnership/LLP. (2.9)

The exclusion from tax for loan relationship credits in corporate rescue will be widened.  At present banks sometimes cannot access this exclusion as they cannot, or do not, want to take equity in the distressed company.  The exclusion will be widened, and the interactions between the various provisions (s 322 and s 361 & s 362) will be clarified. (2.12)

Perpetual debt will be taken out of the regime.  Despite protests, HMRC will proceed with some form of rules to remove undated debt which is only repayable on liquidation from the loan relationship regime (2.16)

HMRC will restrict opportunities to use the late payment of interest rules by groups to access otherwise locked in tax losses. “The Government … is of the view that an anti-avoidance rule is not an appropriate vehicle for tax planning.” (2.17)

Possible further changes

A number of other proposals are considered which are lower priority.  This includes clarification of the unallowable purposes rule and minor adjustments to the connected party and group continuity rules to ensure these operate as intended.


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