Legalize / United Kingdom / Statutory-Instrument

The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) Regulations 2004

Type Statutory-Instrument

Publication 2004-12-09

State In force

Department King's Printer of Acts of Parliament

Source legislation.gov.uk

Reform history JSON API PDF

Made: 9th December 2004

Laid before the House of Commons: 10th December 2004

Coming into force: 1st January 2005

The Treasury, in exercise of the powers conferred upon them by sections 84A(3A), 85B(3)(a) and 85B(5)(b) of the Finance Act 1996[^f00001] and paragraphs 16(3A), 17C(1) and 17C(3)(b) of Schedule 26 to the Finance Act 2002[^f00002] make the following Regulations:

Citation, commencement and effect

1

(1) These Regulations may be cited as the Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) Regulations 2004 and shall come into force on 1st January 2005.

(2) These Regulations have effect in relation to periods of account beginning on or after 1st January 2005.

Interpretation

2

(1) In these Regulations—

“CTA 2009” means the Corporation Tax Act 2009;

“CTA 2010 means the Corporation Tax Act 2010;

“deferred shares” has the same meaning as in the Building Societies Act 1986;

“derivative contract” has the same meaning as in Part 7 of CTA 2009;

“exchange gain or loss” has the same meaning as in section 475 of CTA 2009;

“fair value profit or loss” means the profit or loss brought into account in relation to a derivative contract or an asset or liability representing a loan relationship where for the period in question—the derivative contract or asset or liability representing a loan relationship is measured at fair value, orthe derivative contract or asset or liability representing a loan relationship is a hedged item in a designated fair value hedge and the carrying value of the hedged item is adjusted for changes in fair value attributable to the hedged risk;

“hybrid capital instrument” has the meaning given by section 475C of CTA 2009;

“loan relationship” has the same meaning as in section 302 of CTA 2009;

“a section 614 or 615 credit or debit” means the credit or debit to be brought into account in accordance with section 614 or 615 of CTA 2009;

“a prior period adjustment credit or debit” means so much of any credit or debit as represents a prior period adjustment taken into account by virtue of section 597(1)(b) of CTA 2009 as a result of a change of accounting basis;

“underlying subject matter” has the same meaning as in Part 7 of CTA 2009.

(2) In these Regulations—

“for accounting purposes” means for the purposes of accounts drawn up in accordance with generally accepted accounting practice;

“generally accepted accounting practice” has the meaning given in section 1127 of CTA 2010; and

“amortised cost”, consolidated accounts, “designated”, “effective hedge”, “effective interest method”, “fair value hedge”, “firm commitment”, “forecast transaction”, “foreign operation” , fair value, items of other comprehensive income and “net investment in a foreign operation” have the same meaning as for accounting purposes.

(3) In these Regulations any reference to an asset which is a ship or aircraft includes a reference to a contract—

(a) to which section 67 of the Capital Allowances Act 2001[^f00005] applies; and

(b) which relates to plant or machinery which is a ship or aircraft.

(3A) For the purposes of these Regulations, a liability representing a loan relationship or a derivative contract is treated as matched with shares, ships or aircraft from the date that, and to the extent that, either condition 1 or 2 of regulation 3(3) or 4(3) are satisfied.

(4) In these Regulations—

(a) any reference to a hedging instrument includes a reference to part of an instrument; and

(b) any reference to a hedged item includes a reference to part of a hedged item.

(5) For the purposes of these Regulations, a company has a hedging relationship between a derivative contract or a liability representing a loan relationship on the one hand (“the hedging instrument”) and an asset, liability, receipt , expense, forecast transaction or firm commitment on the other (“the hedged item”) if and to the extent that—

(a) the hedging instrument and the hedged item are designated by the company as a hedge; or

(b) in any other case the hedging instrument is intended to act as a hedge of—

(i) the exposure to changes in fair value of a hedged item which is a recognised asset or liability or an unrecognised firm commitment or an identified portion of such an asset, liability or commitment that is attributable to a particular risk and could affect profit or loss of the company;

(ii) the exposure to variability in cash flows that is attributable to a particular risk associated with a hedged item that is a recognised asset or liability or a forecast transaction and could affect profit or loss of the company; or

(iii) a net investment in a foreign operation of the company.

(6) For the purposes of regulations 3 to 5, where an asset referred to is shares in a company, the asset comprises all the shares held in that company whenever acquired.

Exchange gains or losses arising from liabilities or assets hedging shares etc.

3

(1) For the purposes of section 328(4) of CTA 2009 there is prescribed an exchange gain or loss arising to a company in an accounting period in relation to a liability representing a loan relationship of the company which is matched with the whole or part of any shares, ships or aircraft.

(1ZA) But where the matched shares, ships or aircraft are matched after the company became party to the loan relationship, paragraph (1) only applies to a just and reasonable proportion of any exchange gain or loss having regard to—

(a) the fraction of the accounting period for which the shares, ships or aircraft are matched with the loan relationship,

(b) the fraction of the accounting period for which the company was party to the loan relationship, and

(1A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(2) This regulation does not apply if movements in the fair value , or profits or losses arising on the disposal, of any shares, ships or aircraft which are an asset falling within regulation 3(1) are brought into account by the company in computing, for the purposes of corporation tax, the profits of a trade carried on by it which consists of or includes dealing in shares, ships or aircraft.

(3) Shares, ships or aircraft are matched to the greatest possible extent with—

the liability representing the loan relationship designated as a hedge if condition 1 is satisfied;

subject to paragraph (a), the liability representing the loan relationship referred to in condition 2 if that condition is satisfied;

...

Condition 1The condition is that ... the shares, ships or aircraft are a hedged item under a designated hedge of exchange rate risk in which the liability is the hedging instrument.

Condition 2The condition is that the currency in which the liability is expressed is such that the company intends, by entering into or continuing to be subject to that liability, ... to eliminate or substantially reduce the economic risk of holding the asset, or part of the asset, which is attributable to fluctuations in exchange rates.

(4) If condition 2 applies, a liability is matched with an asset only to the extent that the carrying value of the liability ... does not exceed the unmatched carrying value of the asset at the relevant time.

(5) For the purposes of section 328(4) of CTA 2009 there is prescribed an exchange gain or loss arising to a company in an accounting period in relation to an asset representing a loan relationship of the company which is matched with the whole or part of—

(a) any share capital of the company,

(b) in relation to a building society, any deferred shares issued by the building society to the extent that they are accounted for as equity instruments in accordance with generally accepted accounting practice, or

(c) a hybrid capital instrument issued by the company to the extent that it is accounted for as an equity instrument in accordance with generally accepted accounting practice.

(6) An asset is matched with share capital in particular where for the accounting period of the company immediately preceding the first accounting period to which these Regulations apply—

(a) exchange gains and losses on the asset were taken to a reserve; and

(b) set off there against exchange gains and losses on the share capital.

(7) In this regulation—

“carrying value” means, in relation to a liability, the relevant value of that liability; and

“unmatched carrying value” means, in relation to an asset, an amount equal to the value as shown in the company’s accounts to the extent that that amount has not previously been matched in accordance with this regulation or regulation 4.

Condition 1

The condition is that for the accounting period of the company immediately preceding the first accounting period to which these Regulations apply—

(a) exchange gains and losses on the shares, ships or aircraft were taken to a reserve; and

(b) set off there against exchange gains and losses on the liability.

Condition 2

The condition is that for the accounting period, the shares, ships or aircraft are a hedged item under a designated hedge of exchange rate risk in which the liability is the hedging instrument.

Condition 3

The condition is that the currency in which the liability is expressed is such that the company could, by entering into that liability, reasonably expect to eliminate or substantially reduce the economic risk of holding the asset, or part of the asset, which is attributable to fluctuations in exchange rates.

(4) If condition 3 applies, a liability is matched with an asset only to the extent that the carrying value of the liability at the time when the liability is entered into does not exceed the unmatched carrying value of the asset at that time.

(5) For the purposes of section 84A(3A) of the Finance Act 1996 there is prescribed an exchange gain or loss arising to a company in an accounting period in relation to an asset representing a loan relationship of the company which is matched with the whole or part of any share capital of the company.

(6) An asset is matched with share capital if for the accounting period of the company immediately preceding the first accounting period to which these Regulations apply—

(a) exchange gains and losses on the asset were taken to a reserve; and

(b) set off there against exchange gains and losses on the share capital.

(7) In this regulation—

“carrying value” means, in relation to a liability, the value as shown in the company’s accounts of that liability; and

“unmatched carrying value” means, in relation to an asset, an amount equal to the value as shown in the company’s accounts to the extent that that amount has not previously been matched in accordance with this regulation or regulation 4.

Exchange gains or losses arising from derivative contracts hedging shares etc.

4

(1) For the purposes of section 606(4) and 598(1)(a) of CTA 2009 there is prescribed an exchange gain or loss arising to a company in an accounting period in relation to a derivative contract of the company which is matched with the whole or part of any shares, ships or aircraft.

(1A) But where the matched shares, ships or aircraft are matched after the company became party to the derivative contract, paragraph (1) only applies to a just and reasonable proportion of any exchange gain or loss having regard to—

(a) the fraction of the accounting period for which the shares, ships or aircraft are matched with the derivative contract,

(b) the fraction of the accounting period for which the company was party to the derivative contract, and

(2) This regulation does not apply if movements in the fair value , or profits or losses arising on the disposal, of any shares, ships or aircraft which are an asset falling within regulation 4(1) are brought into account by the company in computing, for the purposes of corporation tax, the profits of a trade carried on by it which consists of or includes dealing in shares, ships or aircraft.

(3) Shares, ships or aircraft are matched to the greatest possible extent with—

the derivative contract designated as a hedge if condition 1 is satisfied;

subject to paragraph (a), the derivative contract referred to in condition 2 if that condition is satisfied.

...

Condition 1The condition is that ... the shares, ships or aircraft are a hedged item under a designated hedge of exchange rate risk in which the derivative contract is the hedging instrument.

Condition 2The condition is that the underlying subject matter of the derivative contract is such that the company intends, by entering into or continuing to be party to that contract, ... to eliminate or substantially reduce the economic risk of holding the asset, or part of the asset, which is attributable to fluctuations in exchange rates.

(4) If condition 2 applies, a derivative contract is matched with an asset only to the extent that the value of the obligation under the derivative contract ... does not exceed the unmatched carrying value of the asset at the relevant time.

(4A) For the purposes of section 606(4) of CTA 2009 there is prescribed an exchange gain or loss arising to a company in an accounting period in relation to a derivative contract of the company which is matched with the whole or part of—

(a) any share capital of the company,

(b) in relation to a building society, any deferred shares issued by the building society to the extent that they are accounted for as equity instruments in accordance with generally accepted accounting practice, or

(c) a hybrid capital instrument issued by the company to the extent that it is accounted for as an equity instrument in accordance with generally accepted accounting practice.

(4B) A derivative contract is matched with share capital in particular where for the accounting period of the company immediately preceding the first accounting period beginning on or after 1st January 2005—

(a) exchange gains and losses on the derivative contract were taken to a reserve; and

(b) set off there against exchange gains and losses on the share capital.

(4C) This regulation does not apply to amounts in relation to a derivative contract which are excluded amounts under regulation 5ZA.

(5) In this regulation—

“unmatched carrying value” means, in relation to an asset, an amount equal to the relevant value to the extent that that amount has not previously been matched in accordance with this regulation or regulation 3.

“the value of the obligation under the derivative contract” means the value of the obligation of the company to pay in exchange for one currency an amount of a second currency and includes any notional obligation to pay an amount of currency in respect of a contract for differences.

Condition 1

The condition is that for the accounting period of the company immediately preceding the first accounting period to which these Regulations apply—

(a) exchange gains and losses on the shares, ships or aircraft were taken to a reserve; and

(b) set off there against exchange gains and losses on the derivative contract.

Condition 2

The condition is that for the accounting period, the shares, ships or aircraft are a hedged item under a designated hedge of exchange rate risk in which the derivative contract is the hedging instrument.

Condition 3

The condition is that the underlying subject matter of the derivative contract is such that the company could, by entering into that contract, reasonably expect to eliminate or substantially reduce the economic risk of holding the asset, or part of the asset, which is attributable to fluctuations in exchange rates.

(4) If condition 3 applies, a derivative contract is matched with an asset only to the extent that the carrying value of the derivative contract at the time when the contract is entered into does not exceed the unmatched carrying value of the asset at that time.

(5) In this regulation—

“carrying value” means, in relation to a derivative contract, the value as shown in the company’s accounts of that contract; and

“unmatched carrying value” means, in relation to an asset, an amount equal to the value as shown in the company’s accounts to the extent that that amount has not previously been matched in accordance with this regulation or regulation 3.

Regulations 3 and 4: supplementary

5

(1) Where in any accounting period—

(a) a company holds more than one asset in relation to which there are amounts of exchange gains and losses falling within regulations 3 or 4; and

(b) the currency—

(i) in which the assets are denominated and the liability mentioned in regulation 3(1) expressed; or

(ii) which is the underlying subject matter of the derivative contract mentioned in regulation 4(1) ,

is the same currency, ... the extent to which an asset is matched is determined in accordance with the following rules.

Rule 1 Liabilities and contracts are regarded as matched to the greatest possible extent with assets which are ships or aircraft.

Rule 2Subject to Rule 1, liabilities and contracts are regarded as matched to the greatest possible extent with assets on the disposal of which a chargeable gain would accrue if the disposal were made on a date falling more than 12 months after the date of acquisition of the asset.

Reading this document does not replace reading the official text published on legislation.gov.uk. Contains public sector information licensed under the Open Government Licence v3.0. We assume no responsibility for any inaccuracies arising from the conversion of the original CLML XML to this format.