Pre-Budget Report week

I expected a busy week from the Pre-Budget Report on Monday 5 December, and was not disappointed. There were several announcements relevant to Finance & Treasury in a document posted on the HMRC website titled “International Accounting Standards: Tax Implications.”

(a) Impaired bank debt

There has been silence until now regarding the general bad debt provisions of banks and other financial institutions. The issue is that on adoption of IFRS, a large part of these provisions become impairment reserves, but revisions to tax law mean that impairment reserves are deductible.

It had already been announced on 22 July 2005 that transitional adjustments (i.e. the overnight balance sheet adjustment on adopting IFRS) on other items were to be spread over 10 years starting with the first period of account beginning on or after 1 January 2006.  However, the silence on bank bad debt reserves had cause some concern that the Government might be planning some other arrangement or possibly planning to deny relief altogether.  However, the document states that the transitional adjustment on impaired bank debt will also be spread over the same 10 years.

(b) Securitisation companies

A few weeks ago, my blog posting mentioned the concern that FA 2005 s.83 and s.84 could apply to more companies than expected. FA 2005 s.83 mandates (as a temporary measure) the use of UK GAAP as it stood in 2004, while s.84 permits the Treasury to make regulations for a permanent tax regime for securitisation companies.

The announcement states that “Regulations will be laid early in 2006, to have effect for accounting periods beginning on or after 1 January 2005, to amend the definition of 'securitisation company' for the purposes of the temporary regime, to prevent it applying to non-securitisation companies (such as banks) who issue capital market investments in the course of their normal trade.”  This change should eliminate the risk of these companies unexpectedly having to apply 2004 UK GAAP for tax purposes.

The special regime was originally supposed to be temporary for just 2006, pending a permanent securitisation tax regime.  However, the temporary arrangements will also apply for 2007, to allow more time to come up with a permanent solution.  The announcement also says:

“In the meantime, discussions will continue on the design of a permanent regime for securitisations of financial assets, with a view to the regime coming into force by 1 January 2007.  Representations will be sought on whether a similar regime may be needed for property and whole business securitisations.”

Matthew Barling, a partner at PricewaterhouseCoopers who specialises in securitisation, has explained that the Inland Revenue’s intent when FA 2005 s.83 and s.84 were being drafted was for these provisions to apply only to companies securitising financial assets, where taxing fair value movements on derivatives could have very serious adverse consequences.  The Inland Revenue did not have property and whole business securitisations in mind.  If after consultation a special regime is to be introduced for such securitisations, then further legislation will be enacted.

(c) The Disregard Regulations (again)

The final amendments to the Disregard Regulations, with the final text of the Regulation 9A election, were published on 8 December 2005.  Until now the time limit for the election had always been set at 31 December.  However, HMRC have taken on board representations about the short time limit, and the final regulations specify that the election must be made before 31 March 2006. (While this strictly means that an election made on 31 March 2006 is out of time, we understand that HMRC will accept elections received on that day.)  This should give companies adequate time to decide whether or not to make this irrevocable election.

There is no substitute for thinking about this election case by case.

Leasing

The reform of leasing is definitely coming in April 2006. This deserves more space than I have today, and I will write about it separately.

Mohammed Amin