At Budget 2013, the Government announced consultation on a package of proposals to modernise the corporation tax rules governing the taxation of corporate debt and derivative contracts.
It is likely that there will be no significant recasting of the current regime as a result of this process.
However one of the changes that has come out of that consultation is a change to the way in which the Disregard Regulations will apply to fair value profits in respect of contracts which act as a hedge.
Currently the effect of these Regulations is, inter alia, that fair value profits and losses on derivative contracts which are designated or intended to act as a hedge against an underlying transaction are automatically “disregarded” subject to the ability to “elect out”.
From 1 January 2015 many UK companies who have not already adopted IRFS will be required to apply one of EU-Endorsed IFRS, FRS 101 or FRS 102 which include a requirement to apply fair value accounting in respect of certain derivatives. As a result of the consultation process the rules are to be changed and draft regulations have recently been published.
Where a company adopts fair value accounting for the first time in a period of account commencing on or after 1 January 2015, they will have to elect in for the disregard rules in paragraphs 7,8 and 9 to apply (such that fair value movements are ignored in computing the taxable profits for a period). Previously companies did not need to take any action as the disregard rules applied automatically.
The time limit for making the election will be six months from the start of the period for very large companies (essentially companies within the SAO rules, ones with turnover in excess of £200m or a balance sheet total in excess of £2billion) or twelve months from the end of the period for other companies (assuming that there relevant contracts in place at the start of the relevant period). These companies will then be subject to an initial lock-in period of three years. Thereafter companies will be able to make or revoke an election at any time.
For companies who are currently applying fair value accounting, grandfathering rules effectively mean they are treated as having elected into the disregard regulations (as they are to apply from 1 January 2015) such that no action is required to preserve the disregard treatment. However these companies will have the ability to “revoke” this deemed election should they wish to be taxed on fair value movements at any time in the future on a prospective basis.
The exception is for companies who have previously made an “opt out” election which are effectively treated as remaining outside the disregard. These companies would however have the ability to elect for a disregard treatment under the new rules, again on a prospective basis.
Comment
Companies who are looking to adopt fair value accounting for the first time will need to carefully consider their options. Although the new regulations offer greater flexibility there is a three year lock in for new adopters.
In deciding what option to take new adopters also need to be aware of the effect of the change of accounting policy transitional rules which may spread the recognition of fair value profits and losses as at the date of adoption.
For companies which are already within the scope of the Disregard Regulations there is no need to take any action at the present time. The change in approach may however offer additional flexibility in the future.
Consultation on the changes to the regime will run until 12 September.
If you would like to discuss your options please contact Paul Rogerson paul.rogerson@cwenergy.co.uk 020 7936 8309 or Stewart Norman stewart.norman@cwenergy.co.uk 020 7936 8315 or your normal CW Energy contact.