HMRC has published a consultation on modernising the rules governing the taxation of corporate debt (loan relationships) and derivative contracts, for comment by 29 August.

Piecemeal changes to legislation arising from changes in commercial practice and accounting standards, and in response to attempts to avoid tax, means the tax regime for loan relationships has become complex and incoherent.

The consultation is part of the government's wider clampdown on tax avoidance.

The proposed changes include refining the core structure of the regime and in particular, to clarify the role played by a company's financial statements in identifying and quantifying taxable amounts; basing the loan relationship and derivative contract regimes on amounts recognised in profit or loss in a company's accounts, in line with the normal approach to calculating taxable profits; combining the loan relationships and derivative contracts regimes; revising the detailed rules, including the appropriate tax treatment of connected party debt and transfers of debt around a group, and a substantial overhaul of the approach to the taxation of foreign exchange and hedging relationships; and introducing an integrated and comprehensive anti-avoidance provision.

The government plans to introduce the changes in two stages - in Finance Bill 2014 and 2015 with the first tranche focusing areas in which opportunities for tax leakage exist. Changes for 2015 will encompass wider reform to the structure of the regime and the detailed rules.

The consultation closes on 29 August and is available HERE