Chapter CFM51050
| Published date | 16 April 2016 |
| Record Number | CFM51050 |
| Court | HM Revenue & Customs |
Under CTA09/S307, as it stood before amendment by F(2)A15, the amounts to be brought into account as credits and debits for tax purposes were those which ‘when taken together, fairly represent for the accounting period in question’:
- all the profits or losses of the company which arise from its derivative contracts and related transactions; and
- all expenses incurred for the purposes of those contracts and transactions.
(After the F(2)A15 revisions these have become the “matters” set out in S594A - see CFM51032.
Fairly RepresentsThe use of the formulation ‘fairly represents’ in S595(3), as it stood before amendment by F(2)A was a matter of some controversy. One view, generally taken by HMRC was that the ‘fairly represents’ rule was a ‘general principle’ that meant that the accounts did not necessarily have to be followed in all cases. The ‘fairly represents’ rule, was seen as capable of taking precedence over the accounting treatment.
It was argued that, important as the company’s accounts are, they do not provide the last word on the tax treatment of a company’s derivative contracts. CTA09/S595(3) imposes an additional requirement - the credits and debits to be brought into account must, when taken together, ‘fairly represent’ the company’s profits or losses on its derivative contracts.
It was not considered that the reference to “fairly represents” meant that it was possible arbitrarily to set aside the accounts in any case where the treatment accorded to a derivative contract appears - either to HMRC or to the taxpayer - to give an unfair tax result. However, it was argued that the reference to “fairly represents” imposed certain limitations to the ‘follow the accounts’ approach.
Rather the argument was that the requirement was that the credits or debits must be those that, taken together, represent a profit or loss of the company, as the terms ‘profit’ or ‘loss’ are generally understood. For example, a company may transfer an in-the-money derivative contract to its parent company as a dividend-in-specie. This is...
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