CFM33125 - Loan relationships: core rules: transitional rules for changes made by F(2)A15

F(2)A15/SCH7/PARAS115-119

The changes made to the loan relationships provisions by F(2)A15 affected not only the time at which amounts were to be brought into account for tax, but also, to a more limited extent, the scope. Further, in some cases adjustments could be very large, so transitional amounts were spread over several accounting periods. Accordingly, there is some complexity in the rules.

In particular, under the rules before F(2)A15, amounts initially recognised as items of "other comprehensive income" OCI would normally be taxable unless for example, the Disregards Regulations provided otherwise (see CFM 57000). From 2016 onwards, however, such amounts will not be taxable until the transferred to profit or loss (or on derecognition if not expected to be transferred) - see CFM33080

Transitional adjustments - amounts previously recognised in OCI

PARA115 deals with the scenario where:

  • amounts in respect of a loan relationship matter have been recognised in OCI in accordance with GAAP,
  • those amounts were not subsequently transferred to become items of profit or loss in an accounting period beginning before 1 January 2016, and
  • the amounts were brought into account for CT in such a period.

In working out amounts it is assumed that the accounting policy used in the last period beginning before 1 January 2016 was also applied in earlier periods, unless that earlier policy complied with GAAP.

An adjustment is then computed, on a just and reasonable basis, so as to avoid amounts being brought into account twice.

The adjustment is then brought into account spread over five transitional years as set out in PARA116:

  • Year 1: 40%
  • Year 2: 25%
  • Year 3: 15%
  • Year 4: 10%
  • Year 5:10%

Where accounting period do not coincide with these years, amounts are apportioned on a day count basis.

If, at a subsequent time there is also a change of accounting basis, PARA118 requires that the transitional rules are applied before calculating any amount required to be brought into account under the change in accounting basis provisions.

If a company ceases to be in the charge to CT or a winding up process commences, PARA 119 requires any transitional amounts not yet brought into account to be picked up in the accounting period immediately before the event.