It is worth airing some issues on the record, because the clause is somewhat confusingly drafted. Broadly speaking, we have concluded that it will operate in the manner expected, but the Chartered Institute of Taxation is concerned about whether it and others have correctly understood how the formula will work in relation to liabilities. Addressing those concerns will probably require further discussion with the Revenue rather than an amendment.
The CIT is concerned that the application of the rules to issuers and holders of convertible securities remains unclear, given that section 26 of the Finance Act 2002 does not deal with derivatives relating to shares and that new section 93(5), which is to be included in the Finance Act 1993, might be deleted so that capital gains and allowable losses can be computed in a company's functional currency.
Clause 52 has been generally welcomed, for the same reasons as clause 50 was. The regulation-making power intended to enable the preservation of UK GAAP-style hedging is also welcome. However, as I said, there are some drafting difficulties with the clause.
Finally, there are specific issues in relation to the discussions that have take place with the Revenue. If a company has a dollar functional currency and incurs a trading loss, will that loss be carried forward in dollars and set against the dollar profit in the following accounting period or translated into sterling and set against the sterling equivalent of the dollar profit in the next accounting period? Clearly, in that context, it could be dollar-dollar, euro-euro or renminbi-renminbi.
The question that has been raised relates to paragraph 46 of the explanatory notes, which states that regulations will be made under paragraph 13 of schedule 26 to the Finance Act 2002. Where a corporate investor holds a convertible bond, increases in the value of the embedded derivative will be subject to corporate tax on chargeable gains. The question that has been raised is how the exercise of the option to convert the security into shares will be treated for tax purposes.
Debate adjourned.—[Jim Fitzpatrick.]
Adjourned accordingly at two minutes to Eleven o'clock till this day at half-past Two o'clock.