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International Accounting Standards - the UK tax implications


Although International Accounting Standards are now often referred to as International Financial Reporting Standards (IFRS) the term "IAS" is used through out for ease of reference.

The Finance Act ("FA") of 2004 and the two Finance Acts of 2005 have contained legislation aimed at ensuring that companies choosing to adopt International Accounting Standards (IAS) to draw up their accounts receive broadly equivalent tax treatment to companies that continue to use UK GAAP (UK Generally Accepted Accounting Practice).

The legislation also caters for those companies that choose to adopt certain new UK Accounting Standards (new UK GAAP) which are very similar to IAS.

FA 2004 included the first tranche of legislation at sections 50 to 54 and Schedule 10 covering the adoption of IAS and the effect of IAS on UK tax.

On 9 December 2004 five statutory instruments were made under powers given by the FA 2004 legislation.
FA 2005 introduced further legislation at sections 80 to 84 and Schedule 4 (and includes amendments of the FA 2004 legislation) again covering the adoption of IAS and the effect of IAS on UK tax.

Finance (No. 2) Act 2005 at Schedule 6 also contained some further amendments.

In July and August 2005 three further statutory instruments were laid. And a statement was made by the Paymaster-General in relation to transitional adjustments on financial instruments, in advance of further regulations.

Those regulations, with three others, were laid in December 2005.

Nearly all the legislation has effect, or is intended to have effect, for periods of account beginning on or after 1 January 2005. Some of the regulations laid in July, August and December 2005 have effect for other periods.
This site contains further information about this legislation and about IAS and the tax implications.


What are IAS?

For the purpose of tax legislation they are all International Accounting Standards (IAS), International Financial Reporting Standards (IFRS) and related Interpretations (SIC-IFRIC interpretations), subsequent amendments to those standards and related interpretations, future standards and related interpretations issued or adopted by the International Accounting Standards Board (IASB) but only so far as they have been adopted by the European Commission. The Commission has adopted all existing IAS, but initially carved out two exceptions from IAS 39. But following the IASB's recasting of the condition for use of the "fair value option" in particular, the Commission has now endorsed IAS 39 (as amended) in full. The Commission has also adopted IFRS 1 (first time application of IAS) and IFRS 2 to 7.

What is UK GAAP?

For the purposes of tax legislation it means "generally accepted accounting practice with respect to accounts of UK companies that are intended to give a true and fair view for the purposes of the relevant provisions of the Companies Acts" – this was originally found at section 836A of the Taxes Act 1988 and is now at section 50(4) FA 2004. This includes, but is not limited to, Statements of Standard Accounting Practice (SSAPs) and Financial Reporting Standards (FRSs) issued by the Accounting Standards Board and its predecessors.

In December 2004 the ASB issued 6 new FRS intended to converge UK GAAP with IAS. These include FRS 25 and 26 which are the UK equivalents of IAS 32 and 39. FRS 26 is mandatory in 2005 only for listed companies without subsidiaries. It is mandatory for 2006 onwards for companies whose financial statements are prepared in accordance with the fair value accounting rules set out in the Companies Act, and may be used for 2005 on a voluntary basis. The presentation aspects of FRS 25 must be used by all companies. The ASB began consulting on a proposal to require all companies, apart from those using the FRSSE (Financial Reporting Standards for Small Enterprises) to use FRS 25 (in full) and FRS 26, but this consultation is now looking more comprehensively at the Board’s convergence policy.

In IFRS 7 the IASB replaces the disclosure parts of IAS 32. The ASB has issued FRS 29 which does the same for FRS 25.

Why are IAS and UK GAAP relevant for tax?

The issue of the relationship between accounting principles, practice and standards and the determination of the tax base for business profits has been a subject of intense discussion by lawyers, accountants, academics and others for many years. 1993 was the year in which the FOREX legislation was enacted implicitly requiring trading businesses to follow SSAP20 for tax purposes and it was the year in which the Courts gave their decision in Gallagher v. Jones and Threlfall v. Jones which established that the principles of SSAP21, even though they were not binding on non-corporate taxpayers such as Messrs Threlfall and Gallagher, prevailed over any supposed judge-made rule of tax law.
The idea however that accounts formed the starting point for tax in a computation of trading profits did not suddenly come upon a surprised world in 1993. To pick one statement to exemplify the point, in 1926 the Lord President of the Court of Session said in Lothian Chemical Co. Ltd. v Rogers (11 TC 508):

"My Lords, it has been said times without number that in considering what is the true balance of profits and gains in the income tax acts - and it is not less true of the Act of 1918 than of its predecessors - you deal in the main with ordinary principles of commercial accounting…. but where these ordinary principles are not invaded by statute they must be allowed to prevail."

This principle itself has been codified in rather more up-to-date language, in section 42 of the Finance Act 1998 which said (before its slight amendment in FA 2002)

"For the purposes of Case I or II of Schedule D the profits of a trade, profession or vocation must be computed on an accounting basis which gives a true and fair view, subject to any adjustment required or authorised by law in computing profits for those purposes."

Section 42 is also applied to the calculation of the profits of a Schedule A business (income from property in the United Kingdom) and an overseas property business.

From 2005-06 onwards it is replaced by section 25 ITTOIA 2005 for income tax purposes.

Similar principles apply where profits for corporation tax purposes do not arise from a trade etc. in the specific areas of debt (loan relationships), derivatives, intangible property, management expenses and leases.

One point to be made about the formulation in section 42 FA 1998 and section 25 ITTOIA is that "adjustment required or authorised by law" is not necessarily limited to adjustments required by statute. It may apply adjustments authorised by case law to the extent that such a departure is still possible.

Government Policy

Government policy, as exemplified in a number of consultative documents and elsewhere can be said to be that:-
There is merit in further alignment of taxable and commercial (i.e. accounting) profits.

But if there are good policy reasons for departing from following accounting rules the Government is prepared to do so.

Where are departures allowed?

This is not an easy question to answer. Many departures from accounting practice may not have been departures when they were enacted. It is only in the last 30 years that there has been a codified body of accounting standards with the force of law behind them. A majority of the tax cases concerning the computation of business profits had no regard whatsoever to the accounting treatment of an item and there is usually little or no evidence in the case reports of what the accounting treatment actually was.

But in most cases it is possible to categorise the reasons for a departure from the accounting results (particularly the more recent legislation) and having done that a number of broad categories appear from which it is possible to derive some principles.

It is these principles the Government has in mind when considering whether further departures from, or alignment with, accounts are required when IAS and revisions to UK GAAP come into force.

The Categories

The somewhat arbitrary division is into 11 categories, of which 1 is the miscellaneous residual category. The other ten are

  • Public policy
  • Transfer pricing
  • Structural
  • Avoidance
  • Tax neutrality
  • Capital items
  • Fiscal incentives
  • Symmetry
  • Realisability & Tax capacity
  • "True reflection"

Some of these, for example avoidance, transfer pricing and symmetry have features in common which might suggest a combined category. Some tax measures fall into more than one category.

The reasons for many of these are obvious – e.g. the public policy arguments for not allowing a deduction for fines and penalties or criminal expenditure. Some however bear further examination particularly in the context of the implementation of IAS. For example, there is a departure from UK GAAP accounts where a superdeduction is given for R & D expenditure – but the departure is simply a matter of quantum. Instead of 100% of the amount shown in the profit and loss account, an extra amount is allowed. But under IAS, some expenditure on R & D is required to be added to an asset in the balance sheet. So to give any relief for this expenditure is a complete departure from the accounts.

But when the question is debated to what extent, if at all, should tax follow accounting the issue usually resolves itself into the question whether "unrealised profits" recognised in accounts should also be included in the tax base. (The same question is not always asked or answered in the same way where "unrealised losses" are in issue – e.g. stock at lower of cost or net realisable value).

The Government’s view is that to formulate the enquiry in this way, particularly in relation to fair value changes is to beg the question, because it assumes that the result of marking to market, or fair value accounting, is to recognise an unrealised profit. That this is not necessarily so can be seen from, for example, the ICAEW Technical Release 7/03 on Realised Profits and 21/05 on Distributable Profits: Implications of IFRS.

In any case, the answer to the question is - it depends. And what it depends on is whether the recognition of a fair value increase is effectively little different from a realisation for cash (because for example the asset has a ready and liquid market or the asset is capable of acting as security or collateral for a loan).

This principle is already at work in the tax system. The proposition that businesses must pay tax on profits represented by debts owing, and adjusted for stock or work in progress is not seriously questioned. And it is already recognised in the loan relationships legislation in Chapter 2 Part 4 Finance Act 1996 and the derivative contracts legislation in Schedule 26 FA 2002, where profits arising when a "mark to market" method of accounting is used and when exchange gains accrued are brought into account for tax purposes, even if the profits are taken to reserve.
And where a financial concern is charged under Case I of Schedule D on its profits from turning over shares, it too is charged on mark to market profits where that basis of accounting is used.

On the other hand the Government has recognised that such an approach is not necessarily appropriate where real property is concerned which is held as an investment. One issue at work here is "ability to pay", which is based partly on ready realisability of the asset, and partly on the question whether the payment is of tax which might, in the case of a property investment company with a few large properties, seriously damage the future profit earning capacity of the company.

Volatility is relevant here too, but too much can be made of this. The ability of companies which do not follow mark to market for tax purposes to realise losses without realising gains means that changes in the level of tax receipts from their investment assets reflect movements in market prices and interest rates more closely than might be expected in a pure "realisation" system (and hence are more volatile). A pure "realisation" basis might even be more volatile than the cyclical volatility given by a mark to market basis. The ability to hedge effectively in post tax terms also reduces volatility.

One major aspect of the "fair value" debate revolves around hedging. The Government’s view is that it is desirable to maintain an effective hedging regime for tax purposes. Much of the legislation in the financial field, in relation to currency and interest rate instruments has been designed to allow effective post-tax hedging. If necessary legislation will depart from accounting results where for example only one side of a hedge is fair valued.

IAS as acceptable as UK GAAP

Section 50 of the Finance Act 2004 redefines "generally accepted accounting practice" to include both EC adopted IAS and UK GAAP (as it may be) for periods beginning on or after 1 January 2005 (the date in the EC Regulation). The section as originally enacted contained an alternative date dealing with the case where a company brings forward its accounting date under section 223 of the Companies Act - but following the omission of this alternative from the Companies Act regulations on accounting standards section 50 was amended by paragraph 50 Schedule 4 FA 2005 to remove this alternative rule.

The section applies where companies and other entities prepare accounts using IAS. This means that where a partnership or trustees of a unit trust prepare such accounts, they will be as acceptable for tax as those prepared by companies.

The main thrust of the section is to make IAS as acceptable for tax purposes as UK GAAP – wherever a provision (such as section 42 Finance Act 1998) refers to GAAP it will include a reference to IAS.

The section, as originally enacted in FA 2004, also deals with the issue of what is to happen if any IAS are not adopted by the European Commission in time. A company may then use the unadopted standard or UK GAAP in relation to the particular matters covered by the unadopted standard.

Paragraph 49 Schedule 4 FA 2005 amends section 50 to take into account the fact that some companies, particularly controlled foreign companies, may be subject to the law of a territory outside the European Union which permits accounts to be drawn up using IAS – and that will be the full version of IAS 39, not the EC carved out version. It also takes into account that some UK companies may use the full version of IAS 39 and so treats both versions as equally valid for tax purposes. In this regard see the ASB note "Guidance on the application of IAS 39 by entities preparing their financial statements in accordance with EU-adopted IFRSs" (ASB PN 262). This issue has receded in importance now that the EC has endorsed the revised version of IAS 39 in full.

Companies Act etc. changes

Regulations which adapted the Companies Act 1985 - (the Companies Act 1985 (International Accounting Standards and Other Accounting Amendments) Regulations 2004 SI 2004/2947) in relation to GB companies and the Companies Order 1986 (The Companies (1986 Order) (International Accounting Standards and Other Accounting Amendments) Regulations (Northern Ireland) 2004 SR 2004/496) in relation to Northern Irish – were made in December 2004.

To reflect these changes, a number of other provisions in the Tax Acts are also amended by Finance Act 2005 where they refer to accounts drawn up under the Companies Act 1985 or to consolidated accounts so drawn up.
Paragraphs 21, 32 and 33 Schedule 4 FA 2005 amend respectively -

  • section 43A(3) (rent factoring: definition of financing arrangement) – but see below
  • paragraph 30(1) Schedule 12 FA 1997 and
  • section 219 Capital Allowances Act 2001 (finance leases)

to generalise the references in them to "consolidated group accounts". This is because many groups of companies will not in future be required by the Companies Act 1985 or the Companies Order (NI) 1986 to draw up such accounts, but will be required or permitted to do so in accordance with IAS as a result of EC Regulation 1606/2002 which has direct effect in the UK.

Paragraph 6 Schedule 6 FA 2006 insert sections 774A to 774G ICTA which include at section 774G(5) a reference to "consolidated group accounts". Paragraph 1 of the Schedule repeals sections 43A to 43F ICTA (so including section 43A(3)) as those sections are replaced by sections 774A to 774G.

Paragraph 38 of Schedule 4 provides for amendments to paragraph 6 Schedule 29 FA 2002 (Intangible fixed assets). This allows resort to be had to consolidated accounts in considering the life of an asset or its cost. . Paragraph 38(2), by omitting paragraph 6(2) of that Schedule, generalises the references to "consolidated group accounts" for the same reasons as mentioned above.

Paragraph 38(3) of Schedule 4 substitutes a new paragraph 6(3) Schedule 29. Previously that prevented resort to consolidated accounts if they were prepared under the law of another territory and were dissimilar to UK GAAP. The new paragraph 38(3) prevents resort if they prepared under a different accounting framework which diverges from that used in the individual accounts. In this way, where the individual accounts are prepared under UK GAAP and the consolidated accounts under IAS, it will not be possible for the Revenue to argue that e.g. goodwill should not be amortised because it is not amortised under IAS. It also still applies where the consolidated accounts are prepared using a foreign GAAP.

Paragraph 23 Schedule 4 amends section 501A ICTA – supplementary charge for ring-fence trades in the North Sea - to generalise the reference to accounts drawn up in accordance with GB or NI companies legislation with the more general term "in accordance with GAAP" which term also includes IAS.

Paragraph 25 Schedule 4 repeals section 836A ICTA. That section was replaced by section 50 FA 2004 for periods beginning on or after 1 January 2005 but was not repealed by that Act. Paragraph 48 in consequence amends the Income Tax (Earnings and Pensions) Act 2003 to change a reference to section 836A ICTA (definition of GAAP) to become a reference to section 50 FA 2004 which replaced it.

Section 51 (PDF 42K) FA 2004 deals with the situation where a company is permitted to use IAS and has a transaction with another group company which uses UK GAAP. If the transaction has as a main benefit the conferring of a tax advantage as a result of different accounting treatments, the IAS company will have to use UK GAAP for the transaction for tax purposes. An Explanatory Note (PDF ) for the section can be found on the HM Treasury website.

Some concern has been expressed about the width of this section. But it is not as wide as it looks. The disparity in treatment of the transaction has to be as a result of the use of two different accounting frameworks. An example often quoted is where one company uses mark to market or fair value accounting for its end of a transaction, such as a loan, and the other uses cost accounting. But this difference exists already under current UK GAAP, and it exists within IAS. The cases where IAS provides a clear difference in accounting treatment of the same transaction from the UK GAAP treatment are in fact difficult to find. The legislation is essentially really a back stop in case any such differences emerge.

For other issues arising from IAS the notes hyperlinked from the table below will give more information, see notes


Table of Comparisons







Reporting financial performance








Cash flow statements

Not relevant



Errors & changes of basis


IAS 10


Post BS events

Not relevant

IAS 11


Construction contracts


IAS 12

FRS 19/FRS16

Income taxes

Not relevant

IAS 14


Segment reporting

Not relevant

IAS 16

FRS 15

Property, plant & equipment


IAS 17/SIC 15




IAS 18

FRS 18, 5/UITF 40



IAS 19

SSAP 24/FRS 17

Employee benefits


IAS 20


Govt grants


IAS 21

SSAP 20 & FRS 23

Currency accounting



FRS 6/7

Business combinations


IAS 23

FRS 15

Borrowing costs


IAS 24


Related party disclosures

Not relevant

IAS 26


Retirement benefit plans

Not relevant

IAS 27


Consolidated a/cs


IAS 28




IAS 29

FRS 24



IAS 30

FRS 13

Bank disclosures

Not relevant

IAS 31


Joint ventures


IAS 32

FRS 13 & 25

Financial instrument disclosures


IAS 33

FRS 14 & 22


Not relevant

IAS 34



Not relevant

IAS 35/ED4


Discontinuing operations

Not relevant

IAS 36

FRS 11



IAS 37

FRS 12



IAS 38

FRS 10/SSAP 13/UITF 29

Intangible assets


IAS 39

FRS 4, 5, 26 & SSAP 20

Financial instrument measurement


IAS 40


Investment property


IAS 41


Biological assets




First time application




Share based payment


IFRS 3 - see IAS 22


Business combinations




Insurance contracts




Non-current Assets Held for Sale and Discontinued Operations




Mineral resources



FRS 29

Disclosure of financial instruments



1. Reporting financial performance (IAS1/FRS3)

UK tax law uses the balance on a profit and loss account as the starting point for

  • Case I basis computations (incl. Schedule A, overseas property, Case V trades) – section 42 FA 98 & section 25 ITTOIA
  • Non-trading income from loan relationships, derivative contracts & intangibles

Before FA 2004 it recognised profits taken to reserve (of any kind except share premium reserve) for loan relationships & derivative contracts

Before FA 2004 it recognised profits taken to a statement of total recognised gains and losses (STRGL) for intangibles - paragraph 134 Schedule 29 FA 2002

It uses the concept of profits taken to STRGL as prior period adjustments as a condition for the operation of section 64 and Schedule 22 FA 2002

Paragraphs of Schedule 10 to Finance Act 2004 amend the loan relationships [paragraph 3] and derivative contracts [paragraph 50] legislation to omit references to reserves and to replace them with a reference to the STRGL or the statement of changes in equity.

Paragraph 73 of Schedule 10 to the Finance Act amends the intangibles legislation to add a reference to the statement of changes in equity to the existing reference to the STRGL.

The exclusions in the loan relationships & derivative contracts rules for profits taken to share premium account are not retained by FA 2004. This is because they are unnecessary and attempts have been made to exploit the exemption for tax avoidance purposes.

FA 2005 makes some further changes in this area.

In IAS the principal statement in which profit and loss is recognised is called the "income statement". Such a statement would be included in the "sweep up" provision in section 85B(1)(c) FA 1996, paragraph 17B(1)(c) Schedule 26 FA 2002 and paragraph 134(a) Schedule 29 FA 2002, but to put IAS on an equal footing with UK GAAP the following paragraphs add a reference to the "income statement"–

  • paragraph 26 Schedule 4 FA 2005 to section 85B(1)(a) FA 1996.
  • paragraph 34 to paragraph 17B(1)(a) Schedule 26 FA 2002.
  • paragraph 46 to paragraph 134(1)(a) Schedule 29 FA 2002.

In addition these paragraphs make it clear, by substituting a new section 85B(2) FA 1996 and new paragraphs 17B(2) Schedule 26 and 134(2) Schedule 29 FA 2002 respectively, that a prior period adjustment is always treated as a profit of the period in which it is reported in the STRGL or statement of changes in equity.

Paragraphs 30 and 35 of Schedule 4 FA 2005 insert new paragraph 14A Schedule 9 FA 1996 and paragraph 25A Schedule 26 FA 2002 to provide that amounts which are not reflected in any of the recognised statements but are taken to equity or shareholders funds are brought into account. This includes amounts taken to share premium account and amounts of interest which under IAS 32 or FRS 25 are treated as a dividend on equity.

The IASB has published an Exposure Draft of changes to IAS 1. If adopted they will lead to changes of nomenclature for certain of the financial statements, and accordingly, the legislation described above may need to be amended.
See also Note 18 on IFRS 1 and Note 3 on IAS 8

2. Inventories/stock (IAS2/SSAP9) and construction contracts (IAS11)

SSAP 9 is followed for tax purposes, subject to adjustment under section 100 and 101 ICTA and the rule in Sharkey v Wernher. With the removal of LIFO as an alternative under IAS 2, there seems to be no difference between the two standards that is tax significant. IAS 11 is also consistent with SSAP 9, and no change is envisaged to UK tax law.

3. Errors and changes of basis (IAS8/FRS3)

In a Case I basis computation, section 64 and Schedule 22 FA 2002 have the effect of bringing prior period adjustments for changes in accounting basis into account for tax purposes in the year of change, subject to the reliefs in paragraphs 6 to 8 of the Schedule.

That approach will continue to apply for IAS 8. Section 81 FA 2005 substitutes a new section 64(3) FA 2002 to make it clear that it applies on a change to IAS irrespective of whether a prior period adjustment is shown in the accounts.
Section 64 & Schedule 22 do not apply to fundamental errors. In the case of fundamental errors, UK tax law requires prior periods to be restated. That approach will also continue.

IAS 8 includes what were originally called fundamental errors, but are now simply called "errors", in the statement of changes of equity. The legislation in Schedule 10 to the Finance Act 2004 adding references to that statement excludes fundamental errors from being recognised in the period in which they are reflected in the statement. The errors to which the tax legislation applies should be taken to be those errors which would have been regarded as fundamental before IAS 8.

4. Property, plant & equipment (IAS16/FRS15)

IAS 16 and FRS 15 are primarily about fixed capital assets. UK tax law departs from FRS 15 by disallowing depreciation in respect of capital assets, and instead granting capital allowances (on some assets).

In some cases where "revenue" expenditure is added to the cost of an asset, tax law follows the accounts by recognising for tax purposes amounts reflected in profit and loss account by way of depreciation charge. In those cases where depreciation under IAS 16 differs from that under FRS 15 (e.g. because of revaluation of residual values) tax will follow the IAS amount.

"Renewals" accounting (FRS 15 paragraph 97) is not specifically permitted under IAS 16, so there will be a change of tax adjustment on moving to IAS falling within section 64 FA 2002.

5. Leases (IAS17/SSAP21)

UK tax law is not entirely consistent with SSAP 21 (see Statement of Practice 3/91). But accounts figures (including where appropriate consolidated accounts) are recognised for the purposes of Schedule 12 FA 1997.

IAS 17 differs little from SSAP 21. One difference is that the test for a finance lease is less prescriptive under IAS 17, and a lease of land must be divided into a lease of the buildings and of the land, with the latter usually being treated as an operating lease. It is not considered that this latter change will have any tax effect, and no change to tax law resulting from the introduction of IAS is proposed.

There is a difference between UITF 28 and SIC 15 (lease incentives). The latter (literally construed) requires spreading over the term of the lease unless another way would better reflect the reality; the former over the period to next rent review if shorter. Since the accounting is followed where the incentive is not capital (e.g. a rent free period) the change may alter the time of recognition of income. But it is thought that under SIC 15 it may be appropriate to spread to the next review. In any case there are no plans to change tax law as a result.

For lessors, IAS 17 requires use of the ‘net investment’ method for finance leases, whilst SSAP 21 requires the 'net cash investment method'. There may be significant differences in the timing of income recognition under the two bases. In some cases these affect the timing of income for tax purposes, e.g. where Schedule 12 Finance Act 1997 applies.

Legislation in sections 228B to 228F Capital Allowances Act 2001, and Chapter 5A Part 12 ICTA (inserted by FA 2006) brings the tax treatment of both lessors and lessees of finance leases of plant & machinery into line with the accounting basis in IAS 17 or SSAP 21 as appropriate.

6. Revenue

In general, reporting of revenue in accounts is followed for tax purposes. There is no general standard for revenue recognition in UK GAAP, but the recently added Application Note G to FRS 5 goes some way to dealing with certain aspects of IAS 18. In March 2005 the Urgent Issues Task Force of the Accounting Standards Board issued UITF Abstract 40 "Revenue recognition and service contracts" to provide further guidance on Note G. Legislation in Schedule 15 FA 2006 allows in certain cases, for periods ending on or after 22 June 2005, persons affected by the adoption of Note G as explained by UITF 40, or by adoption of IAS 18 to the same effect, to spread the adjustment arising over a period of between three and six years.

7. Employee benefits (IAS19/SSAP24 and FRS 17)

Under current UK tax law, the accounts figures for contributions to and changes in value of pension schemes are irrelevant for tax, relief being given on a paid (and sometimes deferred basis). The current rules are replaced from 6 April 2006 by sections 196, 245 and 246 FA 2004 as part of the Pension Simplification project, but those sections do not depart from the paid basis or to move to an accounts basis. IAS 19 also deals with non-pension employee benefits – tax rules for these are in e.g. Schedule 24 FA 2003 and statutory provisions will continue to apply.

8. Government grants (IAS 20/SSAP 4)

There is no significant difference between IAS 20 & SSAP 4. UK tax law follows the accounting where the grant is treated as income rather than capital, and this will continue where IAS 20 applies.

9. Currency accounting (IAS21/SSAP 20)

IAS 21 differs from SSAP 20 in that

  • income and expenditure of foreign operations (including branches) are translated at actual or average rates, not at closing or average
  • the presentation currency is not necessarily the same as the functional currency (and translation from the latter to the former follows foreign operation rules)
  • there is no equivalent in IAS 21 for the "cover method" of hedging non-monetary assets (hedging being covered in IAS 39 – see Note 15)

The legislation previously in sections 92 to 94AB FA 1993 is replaced with effect for accounting periods beginning on or after 1 January 2005 by sections 92 to 92E FA 1993 which deal, among other things, with the issue of presentation currency. Translation of foreign operations follows IAS 21. The ASB has issued FRS 23 which follows IAS 21 and will apply to those companies also following FRS 26.

10. Business combinations

FRS 6 and 7 are relevant in UK tax law only where the carrying value of an asset or liability acquired in a business combination is relevant for tax purposes, e.g. for loan relationships. Tax law in most other areas enable adjustments to be made to the values allocated by purchasers – see e.g. section 100(3) ICTA (inserted by section 106 FA 2002). As to goodwill, see Note 13.

IAS 22 and IFRS 3 do require immediate recognition of negative goodwill in some cases, and that may have an effect where the negative goodwill relates to intangible fixed assets. The treatment of provisions may also change. But there are no plans to amend tax law as a result.

11. Borrowing costs

IAS 23 and FRS 15 on capitalising borrowing costs are very similar. UK tax law departs from FRS 15 by allowing relief for capitalised borrowing costs but only where they relate to a fixed asset or project – paragraph 14 Schedule 9 FA 96. The same approach will continue where IAS 23 is followed.

12. Consolidated accounts/associates and joint ventures

The relevance of consolidated accounts and equity accounting is very limited in UK tax law, and it is not thought that IAS represents any significant change that would require revisiting those few areas of UK tax law that do have regard to consolidated accounts (e.g. sections 774A to 774G ICTA, Schedule 12 FA 97 and Schedule 29 FA 02).

Nor does the treatment of associates etc in separate financial statements have relevance for tax under current UK law.

However consolidated accounts can be informative and can provide useful information which does not show up on the face of the individual accounts. For example, under IFRS 2 there is no requirement to incorporate into the reporting entity's own financial statements the assets and liabilities of an Employee Benefit Trust. Instead, the assets and liabilities are only incorporated into the consolidated financial statements of the reporting entity. (See note 19 for the tax treatment of share based payments.)

13. Intangible assets/impairment (IAS 36 and 38/FRS 10 and 11/SSAP 13/UITF 29

Although impairment under IAS 36 is relevant to any assets (other than inventory, financial assets, investment property which is fair valued and biological assets), for tax purposes it is relevant mainly for intangible fixed assets (see Note 4) for tangible assets such as plant and equipment). So this Note also covers IAS 38 (intangibles).

IAS 38 differs from UK standards on intangibles by

  • Not permitting amortisation of goodwill
  • Requiring rather than permitting capitalisation of development expenditure in R&D
  • Requiring website costs, when capitalised, to be treated an intangible asset.

On the first point, it has to be borne in mind that under IFRS1 a company has the option of keeping goodwill at amortised cost at the date of the opening comparative balance sheet in a company’s first IAS accounts, and only impairing from that basis figure.

It is expected therefore that the number of cases where a chargeable intangible fixed asset will be written up to cost is small, given the recent commencement of Schedule 29 and its grandfathering of existing assets. Paragraph 116A and 116B Schedule 29 FA 2002 ensure that any write up on the transition from UK GAAP to IAS will be a taxable credit for Schedule 29, and paragraph 116F ensures that any such credit is limited to the net amount of relief already given. Any impairment from written up cost will be deductible.

On the second bullet point above section 53 (PDF 39K) Finance Act 2004 (which applies for periods beginning on or after 1 January 2005 – see the Finance Act 2004, Section 53 (Commencement) Order 2004 (SI 2004/3268) – maintains the benefits of the R & D deductions and credits by allowing a claim for expenditure treated as on an asset when it is incurred – whether IAS 38 or SSAP 13 is in point.

Where website costs have been the subject of capital allowance claims, but are reclassified as intangible fixed assets under IAS 38, a new paragraph 73A Schedule 29 (inserted by paragraph 71 of Schedule 10 FA 2004) will disapply the intangibles rules, and capital allowances will continue.

Where costs on expenditure such as software has been written off to profit and loss account and claimed as a deduction in a Case I computation, there will be a credit under the intangibles legislation in Schedule 29 FA 2002 or by virtue of section 64 FA 2002 if the expenditure is capitalised under IAS 38. Paragraph 6 Schedule 22 FA 2002 may apply in the latter case.

Paragraph 45 Schedule 4 FA 2005 inserted Chapter 13A containing paragraphs 116A to 116H into Schedule 29 to provide a comprehensive set of rules for the transition to IAS and especially for cases where what is included entirely as goodwill under IAS 38 is disaggregated into different types of intangible property with different amortisation rates or impairment factors.

Guidance on many of these issues is in HMRC’s CIRD Manual (see paragraphs 12300, 13070, 25145, 81450, 98500).

14. Provisions

There is no significant difference between IAS 37 and FRS 12 which is followed for tax purposes (subject to adjustment where the expenditure is capital for tax purposes or otherwise disallowable).

15. Financial instrument measurement

IAS 39 provides a comprehensive standard for the measurement of all financial assets and liabilities. By contrast except in the case of issuers, where FRS 4 applies, as of November 2004 there was no specific standard for such instruments in UK GAAP. SSAP 20 dealt with some issues in relation to exchange gains and losses on financial instruments and FRS 5 addresses some recognition and derecognition issues, e.g. in the case of repos, but otherwise accounting for financial instruments was based on FRS 18 and particularly the accruals principle, and relevant provisions of company law.

In December 2004, the Accounting Standards Board issued FRS 26 which follows IAS 39 (except in relation to the derecognition paragraphs, where FRS 5 still applies until 2007). It applies to listed companies not using IAS for 2005 and to other companies for 2006 (voluntary for 2005) if they take advantage of the option to use fair value accounting that is now part of UK company law. The derecognition paragraphs of IAS 39 will be incorporated in FRS26 with effect from 1 January 2007.

Before 2005, UK tax law provides in general that the accounting treatment of financial instruments (except in the case of shares) was followed for tax purposes – in the loan relationships and derivative contracts legislation. That law required "accruals" accounting to be followed, but drew a distinction between the methods of dealing with changes in value of an asset or liability. The so called "authorised accruals method" followed in general a realisation basis for such changes, but recognised impairment in assets through the bad and doubtful debts rules. But where a company used an accounting method (authorised mark to market) which brings gains and losses into account by reference to a fair value at the end of each period, tax law recognised those gains and losses as they accrued.
A particular aspect of the tax legislation where it departed from the normal principle of looking only at the profit and loss account was the rule that most items taken to reserve (which includes the STRGL in UK accounting) are brought into account when so taken.

The main change brought about by IAS 39 and FRS 26 is that certain assets and liabilities must be measured using what in "old" UK tax terms is an authorised mark to market method. This applies to

  • Assets and liabilities actually held for trading
  • Assets and liabilities designed at outset by the company as at fair value through profit and loss (but in relation to liabilities this designation of liabilities may not be available in certain cases).
  • Assets (called "available-for-sale" – AFS) which do not fall into the categories of "loans and receivables" or "held to maturity" or are designated as such.
  • All derivative financial instruments
  • Any part of a hedged asset or liability where a hedging instrument is fair valued

IAS 39 requires gains and losses on AFS assets to be taken to "equity" (i.e. a reserve) and so such gains and losses will fall to be brought into account for tax purposes when recognised.

This represents a change in the tax treatment of most if not all of the items other than those in the first bullet where in general an authorised mark to market method is already applied for tax.


The Government accepts that there is a case for certain assets, liabilities and contracts being taxed on the basis of a different accounting method from the one required by IAS 39 and proposed UK GAAP. In particular it accepts that
Gains and losses on currency contracts, commodity contracts and debt contracts hedging future revenues and other forecast transactions should be accounted for tax purposes in accordance with current UK GAAP where there is no recognition of such gains and losses on the corresponding hedged amount.

Gains and losses on interest rate contracts may be accounted for tax purposes in accordance with current UK GAAP where there is no recognition of fair value changes on the corresponding hedged amounts is recognised.

Exchange gains and losses on liabilities which hedge a non-monetary asset will continue to be disregarded until disposal of the hedged asset, even if the relevant gains and losses are not taken to reserve, nor matched there with gains and losses on the non-monetary asset.

Legislation in Schedule 10 to the Finance Act (paragraphs 3 and 49) together with the existing (but amended) powers in section 84A FA 1996 and paragraph 16 Schedule 26 FA 2002 permit regulations to be made to give effect these changes.
The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) Regulations 2004 (SI 2004/3256) ("the Disregard Regulations") set out in detail the rules to be followed.
They have been amended subsequently by

  • the Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (SI 2005/2012) which provided that if a company wished to elect out of the treatment imposed by the regulations 7 and 8 of the Disregard regulations it had until 1st October 2005 to do so
  • the Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2005 (SI 2005/3374) which further amended the Disregard regulations. In particular they provide that a company may match net asset value (NAV) of shares rather than accounts value where matching under SSAP 20 on NAV was used. And a new regulation 9A allows a different treatment of interest rate contracts for this entities such as banks which would have difficulty in coping with regulation 9.

Guidance on the application of the regulations is available in the HMRC Corporate Finance Manual at CFM13270. A consolidated version ("Keeling Schedule") of the Disregard regulations has been published.


The effect of IAS 39 is to introduce a much greater risk of volatility to the profits and therefore the tax of securitisation Special Purpose Vehicles (SPVs). SPVs are particularly dependent on an appropriate rating of debt. But if rating agencies are unsure of the potential tax liabilities of an SPV they may be unwilling to grant a rating or may wish to downgrade ratings previously granted to SPVs that were set up before the accounting changes came into effect.

In response, the Government introduced a temporary regime in section 83 FA 2005 allowing certain SPVs to continue using UK GAAP as it stood on 31 December 2004. This temporary regime was extended in FA 2006 for a further year to cover periods of account beginning on or after 1 January 2005 and ending before 1st January 2008 to allow time to for the development of a permanent solution with the sector.

The permanent regime for securitisation SPVs is now set out in The Taxation of Securitisation Companies Regulations 2006 (SI2006/3296) (PDF 70K), which were made on 11 December 2006. Guidance on the application of the regulations is available in the HMRC Corporate Finance Manual at CFM20200.

There is a type of securitisation company which is not included in the scope of the regulations – an insurance SPV. The Financial Services Authority has issued a Consultative Document on implementation of the EC Reinsurance Directive (2005/68/EC) and has included in that consultation a Chapter about the treatment in the UK of insurance SPVs (as to which see article 46 of the Directive).

These are companies which carry on insurance business as pure reinsurers and which finance their obligations by the issue, indirectly through other securitisation companies, of capital market investments.

At present only a few, and possibly one, of such companies used by UK groups is authorised by the FSA. Under current tax law it would be treated as subject to tax under Case I of Schedule D in accordance with the life assurance tax provisions, such as section 83 FA 1989. The tax charge would therefore be based on the surplus from operations shown in its return to the FSA together with any income and gains from assets held outside its long-term fund.

But the FSA’s proposals for insurance SPVs include removing any requirement to submit a periodical return to the FSA. That would mean that special rules will be required to impose a liability to tax using the rules of Case I as they apply to other companies, i.e. based on accounts drawn up in accordance with GAAP (whether UK standards or IFRS).

The question for consideration by the insurance industry is whether it would be better to bring all insurance SPVs with the regulations if possible. If so, how should an insurance SPV be defined for this purpose? Is the definition in article 2.1(p) of the Directive suitable?

If it is not appropriate to being insurance SPVs within the regulations, it will be necessary to use section 431A ICTA to make an Order modifying the tax treatment of insurance SPVs so that the life assurance tax provisions do not apply to them. This might be best achieved by excluding them from the definition of insurance company in section 431(2).

Deferral of transitional adjustments to loan relationships and derivative contracts.

In December 2004 the Government considered various representations about the impact of the transitional rules when a company moves from current UK GAAP to either IAS or FRS 26. In view of the size of some of the known impacts, and the fact that many of the impacts could not be determined until companies made the calculations after the year end, the Government decided to defer the tax impact of all transitional adjustment pending obtaining further information about the amounts involved. This deferral was given effect to in the Loan Relationships and Derivative Contracts (Change of Accounting Practice) Regulations SI (2004/3271)(The CofAP Regulations). Those regulations formally deferred the recognition of most adjustments until a period beginning on or after 1 January 2006.
The exceptions to deferral in these CofAP Regulations are -

  • transitional adjustments where the asset or liability concerned is one which comes to a natural end in 2005 because it is repaid or redeemed on the date which is the latest date on which , under its terms, it falls to be repaid or redeemed.
  • transitional adjustments in relation to a derivative contracts which hedge an asset or liability described in the previous bullet, other than ones which fall anyway to be disregarded under regulations 6, 7 or 8 of the Disregard regulations.
  • transitional adjustments in relation to hybrid contracts (those to which sections 92, 92A and 93 FA 1996 apply on transition).

On 22 July 2005, the Paymaster-General announced that regulations would be laid under which most transitional adjustments relating to financial instruments arising where a company adopts International Accounting Standards (IAS), in particular IAS 39, or adopts the new UK equivalent FRS 26 for the first time would be spread over a period of 10 years beginning in 2006. This would not apply to impairment losses of financial institutions or the writing back of "dormant accounts" which would be the subject of further consideration.

But the Paymaster-General also said that the position would be reviewed again in 2006 when more information is available.

In addition in July 2005 new regulations 11 and 12 of the Disregard Regulations were made which created a comprehensive treatment of the loan relationship credits and debits (including any transitional credits and debits) on hybrid contracts which existed at the beginning of a company’s first period to begin on or after 1 January 2005. And changes to Schedule 26 Finance Act 2002 made by the Finance Act 2002, Schedule 26, Part 2 and 9 (Amendments No. 2) Order (SI 2005/2082) provide that the derivative contracts legislation will not in general apply to the derivative treated as embedded in a hybrid contract, and that the chargeable gains treatment applying before 2005 will in general continue to apply to existing contracts.

In December 2005 a further announcement was made to the effect that banks' impairment losses would be spread over the same 10 year period as other adjustments, and that a decision on dormant accounts would be deferred to 2006.

The Loan Relationships and Derivative Contracts (Change of Accounting Practice) Regulations 2005 (SI 2005/3383) gave effect to the proposal; they also include some further cases where transitional adjustments will never be brought into account. A consolidated version of the CofAP Regulations has been published. For further guidance on the transitional provisions applying to financial instruments see Transitional Adjustments

Tainted "held to maturity" assets

The Government has also recognised that it would be inappropriate to require a company to follow AFS treatment where assets treated as "held-to-maturity" are "tainted" by the sale of an small number of such assets. Section 90A FA 1996 (inserted by paragraph 8 Schedule 10) allows regulations to be made to allow companies to keep "held-to-maturity" status and to use amortised cost accounting for these assets for tax purposes. Regulation 5 of the CofAP regulations achieves this. But an election for this treatment has to be made within 90 days of the end of the company’s accounting period in which the tainting disposal takes place.

Accounting bases

The pre-2005 tax legislation which drew a distinction between an accruals and a mark to market basis worked on each asset and liability. Given that under IAS 39 it is possible for part of an asset or liability to be fair valued and part not, and in the light of the changes in terminology in IAS which are also likely to be reflected in UK GAAP, the loan relationships and derivative contracts legislation was amended in Schedule 10 FA 2004 to remove the concepts of authorised methods. For 2005 onwards the test will simply be following GAAP (whether IAS 39, FRS 26 or pre-2005 UK GAAP) with specific provisions requiring the use of fair value or amortised cost in particular circumstances, as now (e.g. sections 87 and 88A and paragraph 4 Schedule 10 FA 1996).

One aspect of the existing loan relationships rules that disappeared with the abolition of authorised methods and the repeal of section 85 FA 1996 was the rule in section 85(2)(c) that prevented an asset or liability being brought into account at a value other than cost where mark to market or fair value accounting did not apply. This rule was aimed at preventing a lower of cost and net realisable value method from being applied. Such a method will still be available to companies that adopt neither IAS 39 nor FRS 26, and paragraph 16 of Schedule 4 FA 2005 inserts a new paragraph 6D into Schedule 9 FA 1996 to preserve the effect of section 85(2)(c).


Part 1 of Schedule 4 FA 2005 made a number of changes in this area. The main ones are to include impairment (and reversal) as giving rise to a credit or debit within the loan relationships code where the asset or liability is a trading money debt within section 100 FA 1996 – paragraph 9 Schedule 4. The main change effected by this is to bring the connected persons rules for impairment in paragraph 6 Schedule 9 FA 1996 into play.

The move to section 100 for impairment of money debts would have left only a narrow class of debts still within the general bad debt rules in section 74(1)(j) ICTA. The debts left there were those which are not money debts – for example obligations under barter contracts which involve the exchange of non-monetary items. Section 74(1)(j) was therefore repealed and replaced by a new section 88D ICTA which now refers to impairment and covers only non-money debts. Consequential amendments were made to other parts of the Tax Acts dealing with bad debts – and the sovereign debt legislation in paragraphs 8 and 9 of Schedule 9 FA 1996 was repealed with transitional provisions.
The draft legislation also corrected some weaknesses in the FA 2004 legislation. Paragraph 12 of Schedule 4 ensured, by inserting a new paragraph 5ZA Schedule 9 FA 1996 that a release of connected person debt will always be treated as if it were an impairment even if the debt is not actually impaired.

Paragraph 10 Schedule 4 FA 2005 inserted a paragraph 4A into Schedule 9 FA 1996 which reproduced, with a variation, the rule previously in section 85(3)(c) FA 1996. That rule concerned a company which acquired debt which had been written down as a result of there being doubt as to its repayability on time. It was required to write the debt up for tax purposes to the original amount repayable if the new creditor is connected with the debtor. But paragraph 4A imposes the tax charge on the debtor company. It is subject to the same exception as appeared in paragraph 6B Schedule 9 FA 1996 for certain cases of corporate rescue.

Hybrid contracts

One aspect of the tax treatment of loan relationship assets and liabilities with embedded derivatives is covered by Schedule 10 FA 2004. Paragraphs 11 to 13 Schedule 10 repealed sections 92, 92A, 93 and 94 FA 1996 and replaced them with a simple rule in new section 94A requiring disaggregation (bifurcation) of embedded derivatives from loan relationships, and the taxation of the derivatives under Schedule 26 FA 2002.

Following representations that bifurcation did not apply to indexed linked gilts where the functional currency of the company was sterling, section 94 was restored by paragraph 27 Schedule 4 FA 2005 with amendments to make fair value accounting mandatory for tax purposes.

An order was made in December 2004 under the powers in paragraph 13 Schedule 26 FA 2002 to give effect to the charge under the derivative contracts rules and to give chargeable gains treatment to the equity element in certain convertibles and the land and equity elements in certain asset linked securities, but only in relation to holders. The Order dealing with these matters is the Finance Act 2002, Schedule 26, Parts 2 and 9 (Amendment) Order 2004 (SI 2004/3270). The index-linked element in index-linked gilts is also exempted from tax under this Order. Since December 2004 amendments orders have been laid as follows.

  • the Finance Act 2002, Schedule 26, Parts 2 and 9 (Amendment No. 2) Order 2004 was laid on 10 December 2004.
  • the Finance Act 2002, Schedule 26, Parts 2 and 9 (Amendment) Order 2005 (SI 2005/646) was laid on 16 March 2005
  • the Finance Act 2002, Schedule 26, Parts 2 and 9 (Amendment No. 2) Order 2005 (SI 2005/2082) was laid in July 2005
  • the Finance Act 2002, Schedule 26, Parts 2 and 9 (Amendment No. 3) Order 2005 (SI 2005/3440) was made in December 2005

Together the amendment orders enact -

  • rules about the tax treatment of the issuer of securities where derivative contracts are embedded and which fall to be bifurcated into a debt component and a derivative component (paragraphs 45J and 45K Schedule 26 FA 2002) or an equity component (paragraph 45JA). These rules apply only to issues in accounting periods beginning on or after 1 January 2005. But they also contain specific rules for "existing" liabilities, those owed at the start of such a period.
  • amendments to the rules about the tax treatment of the holder of securities where derivative contracts are embedded and which fall to be bifurcated into a debt component and a derivative component including changes to the treatment of such contracts where the parties are connected.
  • new rules about the tax treatment of contracts which are not loan relationships where derivative contracts are embedded and which fall to be bifurcated into a host contract component and a derivative component (new paragraph 2(3) to (5), 45L and 45M Schedule 26 FA 2002) In particular those rules provide that
    where a company which is a member of a group makes an election under paragraph 45L(2) to follow its accounts in relation to derivatives embedded in an asset or liability not representing a loan relationship, any other group company which is a party to the relevant contracts will be deemed to have made it if it has not actually done so where a contract is transferred to another group member the transferee will be required to adopt the same tax treatment in relation to the contract as applied to the transferor.

where a derivative whose underlying subject matter is commodities is embedded in a contract which is not a loan relationship and the relevant accounting standard requires the derivative element to be divided out, no election may be made under paragraph 45L(2A).

where a derivative is embedded in a long-term insurance contract and the relevant accounting standard requires the derivative element to be divided out, no election may be made under paragraph 45L(2A)

  • amendments to paragraph 50A Schedule 26 about changes of accounting policy to bring it into line with the changes to paragraph 19A Schedule 9 FA 1996 made by paragraph 31 Schedule 4 FA 2005.

See a consolidated version of Parts 2 and 9 of Schedule 26 FA 2002.

Guidance on the taxation of Hybrid contracts is available in the HMRC Corporate Finance Manual at CFM16600. Information is also available on transitional issues in relation to hybrid contracts.

16. Investment property

IAS 40 permits a one time choice to use fair value through profit and loss or cost for investment properties (but mandates fair value for those operating leases treated as investment properties). SSAP 19 on the other hand makes fair value mandatory, but gains on revaluation are taken through the STRGL. However the accounts treatment of investment properties is generally irrelevant for tax, as the capital gains rules apply. There may be cases where a property developer uses land for investment purposes before sale, and in such cases IAS 40 may apply. If the company adopts a the fair value basis, a transitional adjustment may arise falling within section 64 FA 2002.

Where a company elects to treat an interest in a property held which it holds as a lessee under an operating lease as an investment property it is required to account for it as a finance lease. Where this happens the tax rules applying to finance leases will apply.

17. Biological assets

IAS 41 differs from UK GAAP in relation to agricultural assets in that it requires fair value to be used. There are few, if any, companies with biological assets that are likely to adopt IAS for their single accounts, but HMRC is nonetheless continuing to discuss the implications of IAS 41 with interested parties. There are however no plans to prevent fair values being used for tax where the herd basis (which is a statutory departure from the accounts) does not apply.

18. First time application

The main issue that springs from IFRS 1 is its compatibility with section 64 and Schedule 22 FA 2002. Because of the way that differences between previous GAAP and IFRS are recognised (in the opening comparative balance sheet) it is likely that differences arising in the last GAAP period will not be reflected, at least directly, in equity under IAS.
Legislation in paragraphs 36, 67 and 72 Schedule 10 FA 2004 ensures that any differences between the final UK GAAP and opening IAS figures are brought into account for tax in legislation to which Schedule 22 does not apply (intangibles, loan relationships and derivative contracts).

19. Share based payments

Standards on share based payment are irrelevant for tax purposes, as tax deductions for such payments are governed by specific legislation in Schedule 23 FA 2003, and there are no plans to change this.

20. Insurance contracts

The issues raised by IFRS 4 on insurance contracts are primarily relevant for general insurance business, as the profits of life assurance business are generally based on the periodical return made to the Financial Services Authority rather than on GAAP accounts. As a result FRS 27 is unlikely to be of immediate relevance to insurance companies.