Clause 28 makes a change to the corporation tax rules on corporate debt in derivative contracts. It arises from a consultation that the Government launched in June last year on the modernisation of these rules. Consultation has been proceeding since then with a wide range of companies, representative bodies and other interested parties. It has been broadly welcomed by business. This change, which will ensure that certain profits and losses are treated consistently, is being made in advance of wider changes to the regime that will be included in the 2015 Finance Bill.
The changes made here will amend what are referred to as the de-grouping provisions. These rules apply when a loan or derivative is transferred to a company and that company ceases to be a member of a group. Currently, when a loan or derivative is transferred from one company to another in the same group, the rules provide that no tax losses are realised and no gains are taxed. The profit or loss on the loan relationship, or derivative, is not brought into account for tax purposes, unless that financial instrument is later disposed of out of the group.
Where the company acquiring the financial instrument ceases to be a member of the group within six years of the date of the transfer, there is a deemed disposal and re-acquisition of the asset or liability. The effect of this de-grouping charge is that an amount equal to the difference between the carrying value and the market value of the loan or derivative is brought into account for tax at that point. However, unlike equivalent rules in other areas of tax, this charge in most cases applies only one way: profits are brought into charge, but losses are severely restricted. That is, it can increase, but not decrease, the amounts taxed. This feature of the rules is an anomaly, unnecessarily complicates current legislation, and provides no additional protection against avoidance.
The changes made by the clause will remove this anomaly in the current legislation. The clause repeals provisions that restrict losses on loans and derivatives that are brought into account when a company leaves a group. Where this takes place on or after 1 April 2014, the rules will apply to bring into account both profits and losses. This is in keeping with the proposals set out in the consultation document published last year. It will simplify the legislation and help to make it more robust against avoidance, by discouraging schemes that seek to use the rules to transfer tax losses.
In answer to the hon. Lady’s question as to whether there will be any additional revenue from this, the measure does not address a particular avoidance scheme and does not, therefore, give rise to any quantifiable Exchequer yield. The measure is, in fact, part of an extensive and ongoing consultation on the corporation tax rules on corporate debt and derivatives, which will continue over the next year. Her Majesty’s Revenue and Customs will monitor the impact of the change through its engagement with a wide range of stakeholders who are part of the consultation, as well as through its normal risk assessment and inquiry procedures.