Dawn Primarolo, Paymaster General, has announced that the Government intends to introduce legislation in the next Finance Bill which will clarify the way the law operates and ensure that when there is a change in the basis on which profits are taxed
The Government is also acting to relieve the charge that arises when companies make such a change, as has been required by recent court decisions. Without transitional rules, the Court's decision could result in disruption for companies. The Government will introduce "grandfathering" arrangements, that retain the existing treatment for existing assets and phase in the impact of the Court's decision. This will be of particular interest to general insurance companies.
The legislation will replace the existing rules governing changes of accounting basis. The new rules will apply in cases where a change is made to the way that profits of a business are computed for tax purposes.
The legislation will apply generally for accounting periods ending on or after today, and in relation to returns filed or re-filed from today.
The Inland Revenue adds supplementary details:
1. Rules in Section 44 and Schedule 6 of the Finance Act 1998 seek to ensure that where a company changes its accounting basis, any profits or losses that would, as a result of the change, never be brought into account under the new basis are brought into account in the year of change.
2. These rules operate to remove from a charge to tax any amounts that could otherwise be taxed twice. They also deny relief to amounts of expenses that could otherwise be relieved twice in the company, by recovering any deductions already given which could otherwise be given a second time following the change. The rules also apply if receipts or expenses would otherwise fall out of account on a change of accounting basis.
3. Section 44 and Schedule 6 will be replaced by a new set of provisions which will apply both where there is a change of accounting approach giving rise to a prior period adjustment, or where there is a change, either in law or practice, in the way an accounting basis is adapted for tax purposes by making adjustments to it, and in particular where a person moves from making adjustments to an accounting basis to following that basis without adjustments. This can happen for example where a court decides that the adjustments previously made are not in accordance with the law.
4. The approach of Schedule 6 was to bring the prior period adjustment amount into charge (or relieve it) in the period immediately after the change. The new legislation will include relieving provisions that allow the tax effect of the change to be spread over a period.
5. These relieving rules will apply where expenditure has been relieved
as incurred under existing practice, but where court decisions now require
that the expenditure be relieved only as it is taken to the profit and
loss account. Applying the existing rules in Schedule 6 to such a change
of tax basis would result in the immediate clawback of tax relief already
granted. In these cases, the new legislation will allow the company to
retain the benefit of the immediate tax relief but will disallow amounts
that would otherwise be relieved twice after the change. These rules
will apply for returns filed or amended on or after today, whenever the
change of tax treatment took place.
6. The new rules will also apply where banks, commodities and derivatives dealers, and certain other financial concerns including general insurance companies, move from a realisation basis to a mark to market basis for tax purposes. Again, without relieving rules, the Schedule 6 approach would tax, in the period of change, the whole of any difference between the cost of the assets and their market value at the time of change, if greater (the "uplift").
7. Instead of bringing the uplift into charge immediately on the change,
a company that moves to a mark to market basis for tax will only be required
to bring the uplift on assets owned at the date of change into tax upon
disposal. Alternatively the company may elect to spread the whole uplift
over six years. These rules will also apply if the market value at the
time of change is lower than cost, but will not apply where the company
has already filed
a return reflecting a change to mark to market.
8. In particular, the new rules will apply to insurance companies that
are required to prepare their accounts on a mark to market basis for all
periods from 1998 onwards, following publication of the Association of
British Insurers' "Statement of Recommended Practice: Accounting
for Insurance Business" in December 1998.
Many companies have accounted for tax on a realisation basis, even though
a mark to market basis is now required following recent court cases.
9. Rather than requiring companies which are still on a realisation basis today to reopen or refile their tax returns, the Government will allow these companies to elect to use the realisation basis for periods of account covering today and earlier periods, and to retain the realisation basis for future periods for all assets held today. Where this election is made, mark to market will apply only to assets acquired after today. Identification rules will be required to equate a part holding of an asset that is sold with a purchase either made after today or on or before today.
10. Where a company makes this election to retain the realisation basis for existing assets, tax on any uplift will be deferred automatically until disposal, so there will be no need for the relieving rules described in paragraph 7.
11. The new provisions do not apply to assets within the loan relationships rules for corporate and government debt, or the financial instruments rules for certain derivatives. They will apply mostly to shares. The rules will not apply to life assurance business.
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