UK and International Tax news

HMRC Issues Draft Legislation On Corporate Debt And Derivative Contracts

Friday 5th September 2014

HMRC has recently issued draft legislation and accompanying documents on modernising the corporation tax rules governing the taxation of corporate debt and derivative contracts, for comment by 12 September 2014. The draft legislation will amend existing regulations in respect of changes in accounting standards, the disregard regulations, and exchange gains and losses.

Over the next few years UK companies are likely to see changes to the accounting standards used to prepare financial statements. In particular, for periods commencing 1 January 2015 many UK companies will be required to apply one of EU-Endorsed IFRS, FRS 101 or FRS 102 [see our UK Tax News articles of 29 January and 16 April 2014).

As part of the consultation process for corporate debt and derivative contracts, HMRC has been seeking the views of external stakeholders as to the impact of these accountancy changes. Respondents generally saw that the current tax rules dealt with the accounting standards satisfactory. HMRC is not therefore making substantial changes to the rules ahead of the accounting changes. However, following specific points raised by respondents, some limited changes are being made with a view to easing the transition to FRS 101 and FRS 102.

The proposed changes are set out in three sets of amending regulations:

The Disregard Regulations provide detailed tax rules governing the tax treatment of particular instruments which are intended to hedge business risks and the amendments are to address certain technical issues concerning their operation.  The key change is to streamline the ability of companies to make an election to “elect-in” to the computational rules rather than being “elect out” as present.

The Change in Accounting Practice Regulations provide detailed rules governing the tax treatment of loans and derivatives where there is a change in accounting practice and the main effect of the proposed amendment is to preserve the existing tax treatment in cases where distressed debt is modified as part of a corporate rescue.

A third set of Regulations is to preserve the existing tax treatment of permanent-as- equity loans.

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