Budget Comment

Corporation tax: modernising the taxation of corporate debt and derivative contracts

Outline of the new measure

This measure updates the rules governing the taxation of loan relationships and derivative contracts by making changes to the computation of profits and losses on these instruments and the rules by which they are taxed.

The major change is that taxation will be based primarily on amounts recognised in the profit or loss account rather than those recognised anywhere else – for example, in reserves or equity.

In addition, the requirement that amounts to be brought into account for tax must "fairly represent" the profits, gains and losses arising, has been removed. These changes will be brought in from 1 January 2016. In addition, there are two other key changes which will have effect on or after Royal Assent of the Summer Finance Bill 2015, being:

• a debt relief provision which relieves credits which arise when debts of companies in financial distress are released, or the terms modified; and

• a targeted anti-avoidance rule which will seek to counter arrangements entered into with a main purpose of obtaining a tax advantage by way of the loan relationships or derivative contracts rules.

Our view

David Hill, Head of Treasury Tax, Grant Thornton UK LLP commented:

"The changes to the loan relationship and derivative contract rules highlighted in the measure have been developed over two years since the consultation document was originally issued. After the delay caused by the General Election, it is good to see these changes being included in the Finance Bill.

The targeted anti-avoidance rule may create some uncertainty for taxpayers as it relies on a purpose test, and similarly, certain conditions for the debt relief provisions feel subjective. It will be interesting to see how these and the other changes take effect in practice, and whether they achieve the simplification of taxation of corporate debt and derivative contracts, as intended by the measure."