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The corporation tax regimes governing debt and derivatives are
accounts-based. The use of international accounting standards (IFRS) or
“modified” UK GAAP (that is, UK GAAP aligned with IFRS) led to a concern
that the corporation tax effect of potentially large-scale adverse
accounting volatility, under the new accounting in relation to financial
instruments, might expose securitisation companies to a risk of commercial
failure. The Government addressed this concern by announcing, in the Finance
Act 2005, a short-term, temporary solution, together with powers to make
regulations that would form a more lasting solution.
The temporary solution was to permit securitisation companies to be treated
for corporation tax purposes as though they had produced accounts in
accordance with UK GAAP as it existed for periods of account ending on 31
December 2004 – that is before any requirement to use IFRS or the IFRS-aligned
UK accounting standards relating to financial instruments. The temporary
solution applied for periods of account beginning on or after 1 January 2005
and ending before 1 January 2008. A measure is now to be introduced to
permit the life of the temporary regime to be extended by regulations.
Regulations were made in December 2006 to institute the new permanent regime
for securitisation companies. In very broad terms, this seeks to subject to
corporation tax only the small amount of profit, typically, that is retained
in such companies. The Government has announced that the regulation-making
power governing these regulations is to be amended so that a wider range of
securitisation may be addressed.
Our view
The proposal to permit the life of the temporary regime to be extended
by statutory instrument should allow some flexibility whilst
securitisations transition from the temporary to the permanent regime.
Similarly, the proposal to extend the scope of the regimes to a wider
range of securitisations – significantly, to insurance securitisations –
will be welcomed by the industry. |
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