Financial arrangements avoidance
The measure
The Budget announced measures to counteract two transactions involving financial arrangements that have been notified to HMRC under the disclosure rules.
The first transaction involves the use of a particular intra-group convertible bond that is highly likely to convert into shares, whereby the borrower accrues an interest deduction for accounting and tax purposes that is greater than the income accrued by the lender. Accordingly, legislation is to be introduced to require the lender to recognise additional taxable amounts, to the extent a deduction is allowed to the borrower.
The second transaction involves a company derecognising income, for accounting purposes, from derivative contracts carried at fair value. The result of the derecognition was that the profits arising to the company in relation to the derivative fell out of account for accounting and therefore tax purposes. Legislation is to be introduced to require full recognition for tax purposes of the profits and losses of the derivative even where these are not recognised for accounting purposes.
Who will be affected?
Companies that have undertaken transactions within the scope of these rules may be affected in relation to any debits and credits arising on or after 22 April 2009 on the relevant loan or derivative.
When?
The legislation for both transactions shall have effect for debits and credits that arise on or after 22 April 2009.
This is an expected targeted response by HMRC to disclosed schemes using financial products. It is unfortunate that no draft legislation has been published so that companies can obtain comfort that the legislation is only effective to counter narrowly targeted arrangements. It is hoped that it will be so targeted such that there are no wider ramifications on other commercial transactions.
