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Taxing Qualifying Corporate Bonds under FRS102

Taxing Qualifying Corporate Bonds (QCB) under FRS102

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I am facing a corporate taxation problem involving a portfolio of quoted QCB's and do not know how to resole it . A client of mine, an invetment company has a  large portfolio of quoted QCB's and all managed by a professional firm of Fund Managers. Under FRS 102, the QCB's need to be revalued at their fair values (being their market values) as at year end . This creates a significant revaluation credit, which under FRS102, needs to go through the P&L account. Taxation of the QCB's is governed by "Loan Relationship Legislation" rather "CGT Legislations" and as such there is no escaping from paying corporation tax on the unrealised gains created on the revaluation of the QCB's and gone through the P&L A/C. Surely this can not be correct ! Can I take out the unrealised credit out of the profit in  the CT computaions ? But this seems to contradict the requirements of LR when used with FRS102 . Can anyone help please. 

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By ms998
12th Dec 2019 09:07

No you can't take them out. You've correctly identified the legislation.

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By rezasamii
12th Dec 2019 09:21

Dear ms 998. I agree. Unfortunately I seem to be correct as under FRS 102 where fair value accounting applies, the tax follows the accounting treatment therefore prohibition in adjusting in the tax computations. Is there any way I can wriggle out of this ? Is anyone at HMR&C looking at this similar to the fiasco surrounding directors interest free loan 2 years ago ?

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Psycho
By Wilson Philips
12th Dec 2019 10:05

What happened when FRS102 was first adopted? I assume that the investments had previously been carried in the accounts at cost, leading to a credit arising on revaluation to fair value? The company would have been able to spread that credit over 10 years - has this been done? If so, all you need to worry about are future increases (or decreases) in value - out of which you can't wriggle.

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Psycho
By Wilson Philips
12th Dec 2019 09:20

There's also no escaping tax relief for the debit should the value of the bonds fall.

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By rezasamii
12th Dec 2019 10:21

Thank you Wilson Phillips. This is a brand new company and the revaluation credit is the difference between purchase prices during the year (YE 31st March 2019) and their fair values as at 31st March 2019. To summarize: The unrealized gain on revaluation of the QCB's , when drafting accounts under FRS 102 is subject to corporation tax under Loan Relationship Legislation. However, same rules do not apply to quoted equity shares as they will be taxed under CGT Rules (i.e disposal proceeds less the base cost + indexation where applicable) . Am I correct ?

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Replying to rezasamii:
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By ms998
12th Dec 2019 12:21

You are correct.

This is a case where understanding the tax consequences of an investment should be understood before making the investment.

Your only exit is the valuation of the QCB. Under accounting rules do you have to revalue. Do you have a reliable source for the valuation?

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Replying to rezasamii:
Psycho
By Wilson Philips
12th Dec 2019 12:27

Yes you are correct - and as already pointed out this is a prime example of the wisdom of checking tax rules before making commercial decisions.

Although unlikely to be of any significant benefit, you might want to check whether section 400 of CTA 2009 might apply to any of the holdings.

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