The Finance Act 2002, Schedule 26, Parts 2 and 9 (Amendment) Order 2004 No. 2201

[Home] [Databases] [World Law] [Multidatabase Search] [Help] [Feedback]

United Kingdom Statutory Instruments

You are here: BAILII >> Databases >> United Kingdom Statutory Instruments >> The Finance Act 2002, Schedule 26, Parts 2 and 9 (Amendment) Order 2004 No. 2201
URL: http://www.bailii.org/uk/legis/num_reg/2004/20042201.html

[New search] [Help]

2004 No. 2201
INCOME TAX
The Finance Act 2002, Schedule 26, Parts 2 and 9 (Amendment) Order 2004

	Made	27th August 2004
	Laid before House of Commons	27th August 2004
	Coming into force	17th September 2004

The Treasury, in exercise of the powers conferred upon them by paragraph 13 of Schedule 26 to the Finance Act 2002[1] make the following Order:

PART 1
Introduction
Citation, commencement and effect
     1. - (1) This Order may be cited as the Finance Act 2002, Schedule 26, Parts 2 and 9 (Amendment) Order 2004 and shall come into force on 17th September 2004.

    (2) This Order has effect in relation to periods of account beginning on or after 1^s^t January 2005 subject to paragraph (3).

    (3) The provisions listed in paragraph (4) have effect in relation to contracts entered into on or after 1st August 2004 in an accounting period ending on or after 17th September 2004.

    (4) The provisions are -

PART 2
Amendment of Part 2 of Schedule 26 to the Finance Act 2002
2. Part 2 of Schedule 26 to the Finance Act 2002 is amended as follows.

3. In paragraph 2, for sub-paragraph (1) substitute -

4. In paragraph 3 -

(a) for sub-paragraph (1)(b) substitute -

(b) in sub-paragraph (1)(c) for "is not treated as described in" substitute "does not fall within";

(c) for sub-paragraph (2)(b) substitute -

(d) omit sub-paragraph (4); and

(e) in sub-paragraph (5) -

5. In paragraph 4 -

(a) after sub-paragraph (1) insert -

" (1A) Nothing in this paragraph prevents a relevant contract to which paragraph 6, 7 or 8 applies from being a derivative contract.";

(b) in sub-paragraph (2) -

(d) in sub-paragraph (5) for "paragraphs 5 to 8" substitute "paragraphs 5 and 5A".

6. In paragraph 5(2)(b) -

(a) at the end of sub-paragraph (i) add "or";

(b) at the end of sub-paragraph (ii) omit ", or"; and

(c) omit sub-paragraph (iii).

7. After paragraph 5 insert -

" Qualified exclusion: embedded derivatives whose underlying subject matter is shares

5A.

- (1) Paragraph 4 does not prevent a relevant contract to which this paragraph applies from being a derivative contract.

(2) This paragraph applies to a relevant contract of a company if -

(3) Paragraph 9 applies for the purpose of determining whether the underlying subject matter of a relevant contract is to be treated as consisting wholly of shares in a company.".

8. In paragraph 6 -

(a) omit sub-paragraph (1);

(b) at the end of sub-paragraph (2)(a)(i) add "or";

(c) at the end of sub-paragraph (2)(a)(ii) for "or" substitute "and";

(d) omit sub-paragraph (2)(a)(iii);

(e) in sub-paragraph (3)(b)(i) -

(f) in sub-paragraph (3)(b) for sub-paragraphs (ii) and (iii) substitute -

(g) omit sub-paragraph 8(a) and (b);

(h) omit sub-paragraph (9); and

(i) in the heading to the paragraph, for "Qualified exclusion:" substitute "Derivative contracts:".

9. In paragraph 7 -

(f) in sub-paragraph (3)(b) for sub-paragraphs (ii) and (iii) substitute -

(g) in the heading to the paragraph, for "Qualified exclusion:" substitute "Derivative contracts:".

10. In paragraph 8 -

(a) omit sub-paragraph (1);

(b) in sub-paragraph (2)(c) -

11. In paragraph 9 -

(a) in sub-paragraph (1) for "any of sub-paragraphs (2) to (4)" substitute "sub-paragraph (2) or (4)";

(b) in sub-paragraph (2)(a) -

(c) omit sub-paragraph (3);

(d) in sub-paragraph (4)(a) for "paragraphs (d) to (f)" substitute "paragraphs (d) and (e)"; and

(e) in sub-paragraph (5) -

12. At the end of paragraph 11 add -

" (7) Where the underlying subject matter of a relevant contract consists of or includes income from any of the following -

the underlying subject matter shall not be treated, by reason only of that income, as being land or such shares or rights (as the case may be).".

13. - (1) Paragraph 12 is amended as follows.

(2) For sub-paragraph (1) substitute -

" (1) This paragraph defines the following expressions for the purposes of this Schedule -

(3) For sub-paragraph (11) substitute -

" (11) "Intangible fixed assets" has the same meaning as in Schedule 29 to this Act; and paragraphs 73 to 76 of that Schedule (and paragraph 72 of that Schedule so far as it relates to those paragraphs) have effect for the purposes of this Part as they have effect for the purposes of that Schedule.".

PART 3
Amendment of Part 9
14. Part 9 of Schedule 26 to the Finance Act 2002 is amended as follows.

15. After paragraph 45 insert -

" Derivative contracts which are to be taxed on a chargeable gains basis

45A.

- (1) This paragraph applies to a derivative contract of a company for an accounting period if any of the following provisions applies to the derivative contract for the period -

(2) Where this paragraph applies to a derivative contract for an accounting period -

(3) For the purposes of this paragraph the relevant credits and debits -

(4) For the purposes of corporation tax on chargeable gains -

but this is subject to sub-paragraph (6).

(5) In sub-paragraph (4) -

C means the sum of the relevant credits for the accounting period in respect of the derivative contract;

D means the sum of the relevant debits for the accounting period in respect of the derivative contract.

(6) Sub-paragraph (4) does not apply in the case of a derivative contract falling within sub-paragraph (1)(b) (embedded option) if, on the assumption that -

paragraph 2 of Schedule 7AC to the Taxation of Chargeable Gains Act 1992[2] (substantial shareholding exemptions: disposal of asset related to shares) would apply to that gain.

Carry back of net losses on derivative contracts to which paragraph 45A applies
45B. - (1) This paragraph applies in the case of a company if the following conditions are satisfied -

(a) there is a net amount of paragraph 45A losses (see sub-paragraph (5)(a)) for an accounting period (the "loss period"),

(b) there is a net amount of paragraph 45A gains (see sub-paragraph (5)(b)) for a previous accounting period (the "gains period"),

(c) the gains period falls wholly or partly within the period of 24 months immediately preceding the start of the loss period,

(d) within 2 years after the end of the loss period the company makes a claim for the purpose in respect of the whole or a part of the net amount of paragraph 45A losses for the loss period.

(2) In any such case -

(a) the net amount of paragraph 45A gains for the gains period, and

(b) the net amount of paragraph 45A losses for the loss period,

shall each be reduced (but not below nil) by the amount in respect of which the claim is made.

(3) For the purposes of sub-paragraph (2) -

(a) the net amount of paragraph 45A gains for a later period must be reduced so far as possible before the net amount of paragraph 45A gains for an earlier period, and

(b) where a gains period falls partly before the start of the 24 month period referred to in sub-paragraph (1), only the appropriate fraction of the net amount of paragraph 45A gains for the gains period may be reduced.

(4) For the purposes of sub-paragraph (3), the "appropriate fraction" is -

where -

A is the number of days in the gains period that fall within the 24 month period, and

B is the number of days in the gains period.

(5) For the purposes of this paragraph -

(6) In the application of sub-paragraph (5) in relation to any accounting period of a company -

G is the sum of the amounts of any chargeable gains treated as accruing to the company in the period under paragraph 45A(4)(a) in respect of derivative contracts of the company ("paragraph 45A gains"),

L is the sum of the amounts of any allowable losses treated as accruing to the company in the period under paragraph 45A(4)(b) in respect of derivative contracts of the company,

N is the sum of the amounts of any non-paragraph 45A losses that would fall to be deducted in the period from paragraph 45A gains, on the assumption in sub-paragraph (7).

(7) The assumption is that, as respects the accounting period, non-paragraph 45A losses are treated as being deducted from non-paragraph 45A gains, so far as possible, before any remainder is deducted from paragraph 45A gains.

(8) In this paragraph -

"deducted" means deducted in accordance with section 8(1) of the Taxation of Chargeable Gains Act 1992[

"non-paragraph 45A gains" means any chargeable gains accruing to the company in the accounting period, other than paragraph 45A gains;

"non-paragraph 45A losses" means any allowable losses of the company that may be deducted in the accounting period, other than losses accruing in the period under paragraph 45A(4)(b).

Derivative contracts relating to land or certain tangible movable property
45C. - (1) This paragraph applies to a derivative contract of a company for an accounting period if the following conditions are satisfied -

(a) the derivative contract is not one to which the company is party at any time in the accounting period for the purposes of a trade carried on by the company (but see sub-paragraph (2)),

(b) the company is not a body falling within sub-paragraph (3);

(c) the underlying subject matter of the derivative contract falls within sub-paragraph (4);

(d) paragraph 45F (embedded derivative which is an exactly tracking contract for differences whose subject matter is land) does not apply to the derivative contract.

(2) The condition in sub-paragraph (1)(a) does not apply if the company -

(a) is party to the derivative contract for the purposes of life assurance business, or

(b) is a mutual trading company.

(3) The bodies that fall within this sub-paragraph are -

     an authorised unit trust;

     an investment trust;

     an open-ended investment company;

     a venture capital trust.

(4) The underlying subject matter of a derivative contract falls within this sub-paragraph if it consists of either or both of the following -

(a) land (wherever situated);

(b) tangible movable property, other than commodities which are tangible assets.

This sub-paragraph is subject to the following qualification.

(5) Where the underlying subject matter of a derivative contract includes income from property of either or both of the types described in sub-paragraph (4) and that income is -

(a) subordinate in relation to so much of the underlying subject matter of the derivative contract as consists of property of either or both of those types, or

(b) of small value in comparison with the value of the underlying subject matter as a whole,

that income shall be left out of account in determining for the purposes of sub-paragraph (1)(c) whether the underlying subject matter of the derivative contract falls within sub-paragraph (4).

(6) For the purposes of sub-paragraph (5) whether part of the underlying subject matter of a derivative contract of a company is subordinate or of small value is to be determined by reference to the time when the company enters into or acquires the contract.

Creditor relationships: embedded derivatives which are options
45D. - (1) This paragraph applies to a derivative contract of a company for an accounting period if the following conditions are satisfied -

(a) section 94A of the Finance Act 1996[

(2) The additional conditions are -

(d) the company is not a body falling within paragraph 45C(3) (authorised unit trusts etc),

(e) this paragraph is not prevented from applying to the derivative contract for the accounting period by paragraph 45E.

(3) The condition in sub-paragraph (2)(a) does not apply if the company -

(4) In this paragraph -

"mandatorily convertible preference shares" means shares -

and for this purpose "relevant time" means a time no more than 24 hours after the acquisition of the shares by a person who, immediately before that acquisition, had the creditor relationship;

"qualifying ordinary shares" means shares in a company (the "relevant company") which satisfy the Conditions in sub-paragraphs (5) and (6).

(5) Condition 1 is that the shares are shares representing some or all of the issued share capital (by whatever name called) of the relevant company, other than -

(6) Condition 2 is that the shares -

(7) In sub-paragraph (6) -

"trading company" has the meaning given by paragraph 22A of that Schedule.

(a) which is specified in the contract for the original asset, or

(b) which is or will be ascertainable by reference to that contract.

(4) Condition 2 is that the rights and liabilities that fall to be treated as comprised in the derivative contract are such that -

(a) the company is entitled or obliged to receive a payment instead of the shares which are the underlying subject matter of the derivative contract, and

(b) the amount of that payment differs by more than an insignificant amount from the value of the shares which the company would be entitled to acquire in accordance with those rights and liabilities at the time it became entitled or obliged to receive the payment.

(5) Condition 3 is that there is for the accounting period a connection (within the meaning of section 87(3) of the Finance Act 1996)[6] between -

and the original asset is not one in relation to which, by virtue only of subsection (5)(b) of section 73, the amendments made by that section do not have effect.

Creditor relationships: embedded derivatives which are exactly tracking contracts for differences
45F. - (1) This paragraph applies to a derivative contract of a company for an accounting period if the following conditions are satisfied -

(a) section 94A of the Finance Act 1996 (loan relationships with embedded derivatives) has effect in relation to a creditor relationship of the company,

(b) the derivative contract is the relevant contract, or one of the relevant contracts, to which the company is treated under subsection (2)(b) of that section as party in the case of that creditor relationship,

(c) that relevant contract is treated by virtue of subsection (3) of that section as a contract for differences,

(d) the additional conditions in sub-paragraph (2) are satisfied.

(2) The additional conditions are -

(a) the creditor relationship is not one to which the company is party at any time in the accounting period for the purposes of a trade carried on by the company (but see sub-paragraph (3)),

(b) the derivative contract is not one to which any of paragraphs 6 to 8 applies,

(c) the underlying subject matter of the derivative contract -

(d) the company is not a body falling within paragraph 45C(3) (authorised unit trusts etc),

(e) the derivative contract is an exactly tracking contract (see sub-paragraphs (4) to (6)).

(3) The condition in sub-paragraph (2)(a) does not apply if the company -

(a) is party to the creditor relationship for the purposes of life assurance business, or

(b) is a mutual trading company.

(4) For the purposes of this paragraph "an exactly tracking contract" is a contract for differences where D is equal to the amount determined by applying R% to C, where -

D is the amount that must be paid to discharge the rights and liabilities that fall to be treated as comprised in the contract;

R% is a relevant percentage change in the value of the underlying subject matter of the contract (see sub-paragraph (5));

C is the amount falling for the purposes of Chapter 2 of Part 4 of the Finance Act 1996 to be regarded in accordance with generally accepted accounting practice as the initial cost of the asset which represents the creditor relationship.

(5) In sub-paragraph (4), the reference to a relevant percentage change in the value of the underlying subject matter of the contract is a reference to the percentage change (if any) over the relevant period in -

(a) the value of the assets which are the underlying subject matter of the contract,

(b) or any index of the value of those assets.

(6) In sub-paragraph (5) "the relevant period" means -

(a) the period between -

(b) any other period in which almost all of that period is comprised, and which differs from that period exclusively for purposes connected with giving effect to a valuation in relation to rights or liabilities under the asset representing the creditor relationship.

(7) In this paragraph "qualifying ordinary shares" means shares which satisfy Condition 1 in paragraph 45D(5).

Property based total return swaps
45G. - (1) This paragraph applies to a derivative contract of a company for an accounting period if the following conditions are satisfied -

(a) the derivative contract is a contract for differences,

(b) one or more indices are designated in the contract,

(c) at least one index so designated (the "capital value index") is an index of changes in the value of land (wherever situated),

(d) the underlying subject matter of the derivative contract also includes interest rates.

(2) In any such case, the relevant credits and debits for the purposes of paragraph 45A(3)(b) are those which -

(a) are given in relation to the derivative contract for the accounting period by paragraph 15, and

(b) fall within sub-paragraph (3).

(3) The credits and debits are those found for the period by applying R% to N, where -

N is the amount which is the notional principal amount in the case of the derivative contract;

R% is the percentage change (if any) in the capital value index over the relevant period.

(4) In sub-paragraph (3) "the relevant period" means -

(a) the accounting period, if the company is party to the derivative contract throughout that period;

(b) in any other case, any part of the accounting period throughout which the company is party to the derivative contract.

Paragraph 45D: treatment of net gains and losses on terminal exercise of option
45H. - (1) This paragraph applies to a derivative contract of a company if the following conditions are satisfied -

(a) the derivative contract is one to which paragraph 45D applies for an accounting period,

(b) rights that fall to be treated as comprised in the derivative contract are exercised to any extent in that accounting period,

(c) those rights are rights to acquire shares which are the underlying subject matter of the derivative contract.

(2) In any such case, for the purpose of computing any chargeable gain accruing to the company on a disposal by it of all the shares so acquired, the sums allowable as a deduction under section 38(1)(a) of the Taxation of Chargeable Gains Act 1992 (acquisition costs) shall -

(a) if G exceeds L, be increased by the amount of that excess,

(b) if L exceeds G, be reduced by the amount of that excess,

and, in the case of a part disposal of those shares, section 42(2) of that Act shall have effect accordingly.

(3) If the amount of the excess in sub-paragraph (2)(b) is greater than the amount of expenditure allowable under section 38(1)(a) of the Taxation of Chargeable Gains Act 1992, the amount of the excess that cannot be deducted from the expenditure so allowable shall, for the purpose mentioned in sub-paragraph (2), be added to the amount of the consideration received for the disposal of the shares.

(4) In this paragraph -

G is the sum of the amounts of any chargeable gains treated as accruing to the company under paragraph 45A(4)(a) in respect of the derivative contract in that or any previous accounting period so far as referable, on a just and reasonable apportionment to the shares acquired as a result of the exercise of the rights mentioned in sub-paragraph (1)(b);

L is the sum of the amounts of any allowable losses treated as accruing to the company under paragraph 45A(4)(b) in respect of the derivative contract in that or any previous accounting period so far as referable, on a just and reasonable apportionment to the shares acquired as a result of the exercise of the rights mentioned in sub-paragraph (1)(b).

Index-linked gilt-edged securities with embedded contracts for differences
45I. - (1) This paragraph applies to a derivative contract of a company for an accounting period if the following conditions are satisfied -

(a) section 94A of the Finance Act 1996 (loan relationships with embedded derivatives) has effect in relation to a creditor relationship of the company,

(b) that creditor relationship is an index-linked gilt-edged security,

(c) the credits and debits which fall to be brought into account for the accounting period for the purposes of Chapter 2 of Part 4 of the Finance Act 1996 in respect of the equivalent deemed loan relationship are non-trading credits and non-trading debits,

(d) the derivative contract is the relevant contract to which the company is treated under subsection (2)(b) of section 94A of the Finance Act 1996 as party in the case of the creditor relationship,

(e) that relevant contract is treated by virtue of subsection (3) of that section as a contract for differences.

(2) The credits and debits that would, apart from this paragraph, fall to be brought into account under this Schedule in respect of the derivative contract for the accounting period shall not be so brought into account.

(3) In this paragraph -

"the equivalent deemed loan relationship" is the loan relationship to which, in the case of the creditor relationship, the company is treated as party under section 94A(2)(a) of the Finance Act 1996;

"gilt-edged security" has the meaning given by section 103(1) of the Finance Act 1996;

"index-linked gilt-edged security" means any gilt-edged security the amount of the payments under which is determined wholly or partly by reference to the retail prices index;

"the retail prices index" has the same meaning as in the Income Tax Acts (see section 833(2) of the Taxes Act 1988)[

16. In paragraph 46(2)(a) -

(a) for "(a)" substitute "(c)";

(b) for "(f)" substitute "(e)".

17. Omit paragraph 47.

PART 4
Consequential amendments
     18. In Part 8 of Schedule 26 to the Finance Act 2002, in paragraph 42(2), omit "(within the meaning of Chapter 2 of Part 4 of that Act)".

     19. - (1) In Part 10 of Schedule 26 to the Finance Act 2002, paragraph 54 is amended as follows.

    (2) In sub-paragraph (1), insert each of the following definitions at the appropriate place -

"creditor relationship" has the meaning given by section 103(1) of the Finance Act 1996;";

"debtor relationship" has the meaning given by section 103(1) of the Finance Act 1996;".

Jim Murphy

John Heppell
Two of the Lords Commissioners of Her Majesty's Treasury

27th August 2004

EXPLANATORY NOTE

(This note is not part of the Order)

This Order amends Parts 2, 8, 9 and 10 of Schedule 26 (derivative contracts) to the Finance Act 2002 (c. 23).

Article 1 provides for the citation, commencement and effect of the Order.

Article 2 introduces the amendments to Part 2 which are made by articles 3 to 13.

Article 14 introduces the amendments to Part 9 which are made by articles 15 to 17.

Articles 18 and 19 contain consequential amendments to Parts 8 and 10 respectively.

The effect of the amendments to Part 9 of Schedule 26 is to clarify the tax treatment of certain types of derivative contracts by excluding certain profits and losses from the charge to corporation tax as income and providing for them to be charged to corporation tax as chargeable gains. The changes apply to derivative contracts whose underlying subject matter is or includes land and to derivative contracts which are deemed to exist as a result of section 94A of the Finance Act 1996 (c. 8) (as inserted by paragraph 13 of Schedule 10 to the Finance Act 2004 (c. 12)), which provides for the accounting treatment applicable to loan relationships to be followed for tax purposes by separating the instrument into a debt component and a derivatives component.

This Order does not impose any new costs on business.

Notes:

[1] 2002 c. 23, paragraph 13 is amended by paragraph 2 of Schedule 9 to the Finance Act 2004 (c. 12).back

[2] 1992 c. 12, Schedule 7AC was inserted by paragraph 1 of Part 1 of Schedule 8 to the Finance Act 2002 (c. 23).back

[3] 1992 c. 12.back

[4] 1996 c. 8, section 94A of the Finance Act 1996 was inserted by paragraph 13 of Part 1 of Schedule 10 to the Finance Act 2004.back

[5] Schedule A1 to the Taxation of Chargeable Gains Act 1992 was inserted by Schedule 20 to the Finance Act 1988 (c. 36) and the definition of "holding company" was substituted by paragraph 4(1) of Schedule 10 to the Finance Act 2002.back

[6] Sub-section (3) was amended by paragraph 7 of Part 1, and by Part 3(12), of Schedule 25 and Schedule 40 respectively, to the Finance Act 2002.back

[7] 1988 c. 1, as substituted by paragraph 22 of Schedule 2 to S.I. 1996/273.back

ISBN 0 11 049744 9

Prepared 3 September 2004

BAILII: Copyright Policy | Disclaimers | Privacy Policy | Feedback | Donate to BAILII
URL: http://www.bailii.org/uk/legis/num_reg/2004/20042201.html

	[Home] [Databases] [World Law] [Multidatabase Search] [Help] [Feedback]
	United Kingdom Statutory Instruments
You are here: BAILII >> Databases >> United Kingdom Statutory Instruments >> The Finance Act 2002, Schedule 26, Parts 2 and 9 (Amendment) Order 2004 No. 2201 URL: http://www.bailii.org/uk/legis/num_reg/2004/20042201.html