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CFM76040 | Other tax rules on corporate finance: change of accounting basis: meaning of ‘tax-adjusted carrying value’

From HM Revenue & Customs · Corporate Finance Manual

CTA09/S465B and S702

Where there is a change in accounting basis for a loan relationship or derivative contract, a transitional adjustment will need to be calculated for tax purposes (see CFM76020). This transitional adjustment arises from cases where there is a change in accounting policy, and also where there is a change in accounting basis required by statute. This requires a comparison of the ‘tax-adjusted carrying value’ (TACV) of the instrument before and after the change in accounting basis.

The starting point for the tax-adjusted carrying value is the carrying value of the loan or derivative recognised in the accounts.

The carrying value in the accounts will need to be adjusted in certain cases to take account of situations where changes in that value have not yet been taxed or relieved, and where part of the carrying value will be taxed or relieved in the future.

Loan relationship adjustments

The tax adjustment provisions for loan relationships are in CTA09/PT5:

  • S308(1A) (amounts recognised in other comprehensive income and transferred to profit and loss),

  • S311 and S312 (amounts not fully recognised for accounting purposes), see CFM33120

  • S320A (amounts recognised in other comprehensive income and not transferred to profit and loss),

  • S323A (substantial modification: cases where credits not required to be brought into account),

  • S324 (restriction on debits resulting from revaluation), see CFM33210

  • S325 (restriction on credits resulting from reversal of disallowed debits), see CFM33210

  • S333 and S334 (company ceasing to be UK resident and non-UK company ceasing to hold loan relationship for UK permanent establishment), see CFM33300

  • CH4 (continuity of treatment on transfers within groups or organisations), see CFM34010

  • S349(2) (application of amortised cost basis of accounting to connected companies relationships), see CFM33130

  • S352 (disregard of related transactions), see CFM35340

  • S352A (exclusion of credits on reversal of disregarded loss),

  • S354 (exclusion of debits for impaired or released connected companies debts), see CFM35320

  • S360 (exclusion of credits on reversal of impairments of connected companies debts), see CFM35320

  • S361 - S363 (deemed debt releases on impaired debts becoming held by connected company), see CFM35440

  • CH8 (connected parties relationships: late interest), see CFM35810

  • S382 (company partners using fair value accounting), see CFM52730

  • S399 - S400C (treatment of index-linked gilt-edged securities), see CFM37130

  • S404 (restriction on deductions etc. relating to FOTRA securities), see CFM37170

  • S406 - 412 (deeply discounted securities and close companies), see CFM37210

  • S415(2) (loan relationships with embedded derivatives), see CFM37660

  • CH13 (European cross-border transfers of business), see CFM34160

  • CH 14 (European cross-border mergers), see CFM34160

Derivative contract adjustments

For derivative contracts the tax adjustment provisions are CTA09/PT7:

  • S584 (hybrid derivatives with embedded derivatives), see CFM52500

  • S585 (loan relationships with embedded derivatives), see CFM52500

  • S586 (other contracts with embedded derivatives), see CFM52500

  • S597 (amounts recognised in determining profit or loss), see CFM51040

  • S599A and S599B (amounts not fully recognised for accounting purposes), see CFM56110

  • S604A (amounts recognised in other comprehensive income and not transferred to profit and loss),

  • CH5 (transactions within groups), see CFM53010

  • CH9 (European cross-border transfers of business), see CFM53120

  • CH10 (European cross-border mergers), see CFM53120

Previous periods

For periods starting before 1 January 2016, the legislation referred to ‘carrying value’ which was defined by CTA09/S317 for loan relationships (now repealed) and CTA09/S702 for derivative contracts (now amended). However, in each case the carrying value was adjusted for specific tax rules that affected how amounts in respect of the loan or derivative were brought into account for tax purposes.

Carrying value and bad debts disallowed

For loan relationships purposes only, a transitional rule in CTA09/SCH2/PARA62 (previously FA96/SCH9/PARA19A(4BA)) provides that in determining the carrying value, no account is taken of bad debts previously disallowed under FA96/SCH9/PARA5(1) for a loan relationship or CTA09/S55 (for a trade debt). The effect is to allow as a transitional debit the amount previously disallowed.

Further guidance

Further guidance on the calculation of the TACV: