Update to Loan Relationship Consultation

HMRC have now issued a technical note on the corporate debt and derivatives consultation.  The note can be found here.

Technical note

The technical note marks a slimming down of the original proposals of the consultation document.  I think this is a good thing, there is no necessity that a consultation should result in a lot of detailed legislation.  The loan relationship legislation has been around from 1996 and it probably warranted a general review.  The conclusion that nothing very much needs changing is in line with my own experience of the legislation, it's certainly better than what went before.

There are a few insurance specific points in the technical note.  

• One area where there will be changes is that loan relationship credits and debits will only be recognized for tax when they are included in the profit and loss, amounts included in "equity" (OCI etc) won't be recognized for tax (until they are "recycled to profit and loss).  These proposals are included at paragraph 2.6 of the technical note.  There is an acknowledgement that not taxing loan relationship movements taken to equity might cause mismatches and volatility in taxable profits for insurers, but there is no detailed discussion of what might be done here.  For a bit more on accounting developments see my post of 10th April 

• Corporate streaming is covered in paragraph 2.13 of the technical note.  This notes that streaming does fulfill an important function for insurance companies with pension business and thankfully doesn't trot out the line that streaming was an anti avoidance measure.  HMRC conclude: "It may be preferable to retain the rules, but in a revised form, possibly with additional anti-avoidance protection to address the manipulation seen by HMRC in the past"  Which is very welcome.  

• What there is no mention of is that if corporate streaming is being retained then we should tighten up the revised section CTA 2009 490 to ensure the FII element of streamed dividends is treated as such in a life insurance company.  This point was covered in my post of 28th March.

• At paragraph 2.14 of the technical note there is an announcement that HMRC will continue to work on improvements to the bond fund rules in CTA 2009 section 490 and 493.  Presumably this will look at the current section 490 (1) (b) that requires that a company treats a collective as a loan relationship if it fails the qualifying investments test at any point in a company's accounting period.  Some relaxation here to prevent funds that have more than 60% of their investments in loan relationships for a short period of time being treated as loan relationships, would be welcome.