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Important date for corporate investors

Companies with monies to invest or investments already in place need to understand the impact of the changes to the Corporate Accounting Standards that are coming in to effect on 1 January 2016.

These changes will impact the reporting requirements of corporate investments for smaller companies.  Prior to this change, smaller companies were able to apply the Financial Reporting Standard for Smaller Entities (FRSSE) which enabled them to report investments on a historic cost basis.


The Finance Act 2008 introduced changes to the tax treatment of investments made by companies.  The Act extended the loan relationship rules to include life assurance policies.  Capital redemption policies, debt instruments (such as bank accounts), and collective investments where underlying investment was more than 60% invested in debt-based stock (cash deposit, fixed interest or Government stock for instance) were already subject to these rules.

Under the loan relationship rules the accounting principles of the company impact the reporting requirements and smaller companies subject to the FRSSE were able to report either on a historic cost or a fair value basis.

Differences in accounting principles:

Historic cost: investments generally only taxed as a non-trading credit on realisation of part or all of the investment (ie withdrawal, encashment, disposal).

Fair value: any increase in the investment over each accounting period will be taxed as a non-trading credit and corporation tax due where a gain is identified over the period.

Following changes in European Law in September 2014 the Financial Reporting Council concluded that the Financial Reporting Standard for Smaller Entities (FRSSE) was no longer sustainable and has therefore withdrawn this standard and replaced it with effect from 1 January 2016, with a small companies regime in FRS 102.  In addition, a new Micro entity regime is being introduced under FRS 105. 

Eligibility criteria extracted from the “Overview of the financial reporting framework – July 2015” provided by the Financial Reporting Council):


  1. For Irish entities, if legislation is enacted, the equivalent thresholds are: Turnover e700,000, Balance sheet total e350,000 and Number of employees 10.
  2. For Irish entities, qualification as a small company is set out in section 350 of The Companies Act 2014. The current equivalent size criteria are: Turnover not exceeding e8.8m, Balance Sheet total not exceeding e4.4m, and number of employees not exceeding 50.  The equivalent thresholds after implementation of the EU Accounting Directive have not yet been set, however the limits in the Directive are: Turnover at or above e8m and not exceeding e12m; Balance sheet total at or above e4m and not exceeding e6m.
  3. As set out in the The Limited Liability Partnerships (Accounts  and Audit) (Application of Companies Act 2006) Regulations 2008

(SI 2008/1911). The thresholds differ from those applicable to companies.

Subject to meeting the criteria, smaller entities will have a choice between three core UK Generally Accepted Accounting Principles (UK GAAP) regimes:

  • The mico-entities regime (FRS 105)
  • The small entities regime (Section 1A Small Entities of FRS 102); and
  • FRS 102 – The financial reporting standard applicable in the UK and Republic of Ireland (where the entity is not applying EU-adopted IFRS or FRS 101).

Businesses meeting the criteria for the micro-entities regime can apply the higher regime if they wish. For example:  Jones the Butchers with eight employees and a turnover of £500,000 per year could elect to apply any of the available regimes.  But the larger business of Smith the Butchers with 12 employees and a turnover of £640,000 could only apply either of the regimes available under FRS102, ie not the micro-entities regime.

What does this mean for smaller companies who wish to invest?

Smaller companies meeting the criteria of the micro-entity regime under FRS 105 will find their reporting requirements are similar to those set in the FRSSE.  They are not allowed to fair value or revalue any assets or liabilities and therefore they will be taxed on realisation of part or all of the investment (ie withdrawal, encashment, disposal) ie historic basis.

Small companies who are too large to meet the criteria of a micro-entity will find their accounting standards changing and investments that are not deemed to be a “basic financial instrument” will need to be accounted for on a fair value basis (where previously they could be reported on either a historic cost or fair value basis).

What is a basic financial instrument?

A basic financial instrument is one which meets the specific conditions of paragraph 11.9 of FRS 102.

The conditions relate to the returns, the contract provisions and the ability to extend a debt instrument.  Put simply the conditions are:

Condition 1 – return to the holder

(i)                  a fixed amount;

(ii)                a fixed rate of return over the life of the instrument;

(iii)               a variable rate of return – linked to a single observable interest rate or to a single relevant observable index; or

(iv)              a combination of a positive or a negative fixed rate and a positive variable rate

Condition 2 – contractual provisions that could be detrimental

There must be no contractual provision that could result in the holder losing their principal amount or any interest attributable to the current period or prior periods.  

Condition 3 – contractual provisions

There must not be any contingency on future events where contractual provisions allow the borrower to prepay a debt instrument or the lender to put it back to the issuer before maturity (except to provide protection against future tax changes or a downgrade in the issuer’s credit).

Condition 4 – extension of a debt instrument

Where a debt instrument includes a contractual provision allowing its extension, the return to the holder during the extended term must satisfy conditions 1-3.

Where an investment meets all of the conditions it can be reported on an amortised cost basis which means it is carried at historic cost less repayments or impairment provisions, ie no annual revaluation to fair value.

However, if an investment does not meet all of the conditions it will be deemed to be a “Complex Financial Instrument”.  Under The small entities regime (Section 1A Small Entities of FRS 102) and FRS 102 these instruments must be accounted for at fair value with any annual revaluation being taxed under the loan relationship regime.

Impact on investments from 1 January 2016

As identified earlier, smaller companies that fall within the definition of a micro-entity who elect to apply FRS 105 will find that their reporting requirements for investments do not change.

However, small companies applying Section 1A Small Entities regime of FRS 102 will need to carefully consider their investment options if they wish to avoid the need to report on an annual basis using fair value where the loan relationship rules apply.

Onshore and Offshore Bonds

It is unlikely, due to the complex nature of onshore and offshore investment bonds, that they will be able to be structured to meet the conditions of a basic financial instrument and as such they will need to be reported annually ie on a fair value basis under the new regime of Section 1A Small Entities regime of FRS 102.


In addition, Section 1A Small Entities regime of FRS 102 will require small companies to report their collective investments on an annual basis using fair value where the underlying investment is more than 60% invested in debt-based stock (cash deposit, fixed interest or Government stock for instance).

Collective investments with  40%+ investment in equities do not fall within the loan relationship rules and as such a tax liability only arises on realisation of the asset, although “income” is taxable on an arising basis.

With effect from 1 January 2016 where a UK company owns a collective, UK life assurance, offshore life assurance or a redemption policy, corporation tax will broadly apply as follows:

Fair value accounting basis:

For entities subject to either FRS 102 or the small entities regime (Section 1A Small Entities of FRS 102) :

Historic Cost Basis:

For micro entities reporting under FRS 105:

Investments generally only taxed on realisation of part or all of the investment (ie withdrawal, encashment, disposal). The investment criteria outlined for collectives above would also not apply.


Whilst the reporting requirements will become more onerous for small companies that do not fall within the criteria of a micro-entity eligible to apply FRS 105, advisers should still consider the merits of onshore bonds, offshore bonds and collectives for their corporate investors. 

Understanding how and when corporation tax may become payable will also help shape the asset mix within the investment portfolio and exit strategies for the company.  

For financial advisers only. Not to be relied on by consumers.

The information provided in this article is not intended to offer advice.

It is based on Old Mutual Wealth or Old Mutual International's interpretation of the relevant law and is correct at the date shown on the title page. While we believe this interpretation to be correct, we cannot guarantee it. We cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this article.

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