Corporation Tax Bill

House of Commons

Session 2008 - 09
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Other Bills before Parliament

Corporation Tax Bill

Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 1 — Introduction
275

How profits and losses from derivative contracts are dealt with
571
General rule: profits chargeable as income
(1)
The general rule for corporation tax purposes is that all profits arising to a
company from its derivative contracts are chargeable to corporation tax as
income in accordance with this Part.
5
(2)
But see Chapter 7, which makes provision for cases in which profits arising to
a company from its derivative contracts are chargeable to corporation tax as
chargeable gains.
572
Profits and losses to be calculated using credits and debits given by this Part
(1)
Profits and losses arising to a company from its derivative contracts are to be
10
calculated using the credits and debits given by this Part.
(2)
For exceptions to this section, see sections 652 to 658 (issuers of securities with
embedded derivatives: deemed options and contracts for differences).
573
Trading credits and debits to be brought into account under Part 3
(1)
This section applies so far as in an accounting period a company is a party to a
15
derivative contract for the purposes of a trade it carries on.
(2)
The credits in respect of the contract for the period are treated as receipts of the
trade which are to be brought into account in calculating the profits of the trade
for that period.
(3)
The debits in respect of the contract for the period are treated as expenses of the
20
trade which are deductible in calculating those profits.
(4)
So far as subsection (3) provides for any amount to be deductible, it applies
despite anything in—
(a)
section 53 (capital expenditure),
(b)
section 54 (expenses not wholly and exclusively for trade and
25
unconnected losses), or
(c)
section 59 (patent royalties).
(5)
For cases in which this section does not apply, see—
(a)
section 616 (disapplication of fair value accounting for certain
embedded derivatives), and
30
(b)
Chapter 7 (chargeable gains arising in relation to derivative contracts).
574
Non-trading credits and debits to be brought into account under Part 5
(1)
This section applies if, for an accounting period, there are credits or debits in
respect of the derivative contracts of a company which are not brought into
account in accordance with section 573.
35
(2)
Those credits or debits—
(a)
are to be treated as non-trading credits or non-trading debits (within
the meaning of Part 5 (loan relationships)) for the period, and
(b)
are accordingly to be brought into account in determining whether the
company has non-trading profits or a non-trading deficit from its loan
40
relationships for the period.

Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 2 — Contracts to which this Part applies
276

(3)
For cases in which this section does not apply, see—
(a)
section 616 (disapplication of fair value accounting for certain
embedded derivatives), and
(b)
Chapter 7 (chargeable gains arising in relation to derivative contracts).
Chapter 2
5
Contracts to which this Part applies
Introduction
575
Overview of Chapter
(1)
This Chapter makes provision about the contracts to which this Part applies.
(2)
In particular, it—
10
(a)
contains a definition of “derivative contract” (see section 576),
(b)
contains other definitions (such as “relevant contract”, “option”,
“future” and “contract for differences”) which are used in determining
whether a contract is a derivative contract (see sections 577 to 583),
(c)
makes provision about cases in which companies are treated as parties
15
to relevant contracts (see sections 584 to 586),
(d)
provides for certain contracts and transactions to be treated as
derivative contracts (see sections 587 and 588), and
(e)
provides for certain contracts to be treated as not being derivative
contracts because of their underlying subject matter (see sections 589 to
20
593).
Meaning of “derivative contract” and other basic definitions
576
“Derivative contract”
(1)
For the purposes of this Part, a contract of a company is a derivative contract
of the company for an accounting period if it—
25
(a)
is a relevant contract (see sections 577 and 578),
(b)
meets any of the accounting conditions for the accounting period (see
section 579), and
(c)
is not prevented from being a derivative contract by section 589
(contracts excluded because of underlying subject matter: general) or
30
any other provision of the Corporation Tax Acts.
(2)
See also sections 587 and 588 (other contracts etc treated as derivative
contracts).
(3)
But note section 701 which includes power to amend the provisions of this
Chapter relating to the meaning of “derivative contract”.
35
577
“Relevant contract”
(1)
In this Part “relevant contract” means—
(a)
an option,
(b)
a future, or

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Part 7 — Derivative contracts
Chapter 2 — Contracts to which this Part applies
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(c)
a contract for differences.
(2)
For the meaning of “option”, “future” and “contract for differences”, see
sections 580, 581 and 582 respectively.
578
Relevant contracts of a company and being party to such contracts
(1)
For the purposes of this Part, references to a relevant contract of a company are
5
references to a relevant contract entered into or acquired by the company (but
see subsection (3)).
(2)
For the purposes of this Part, a relevant contract is acquired by a company if
the company becomes—
(a)
entitled to the rights under the relevant contract, and
10
(b)
subject to the liabilities under it.
(3)
For particular cases where companies are treated as parties to relevant
contracts, see—
(a)
section 584 (hybrid derivatives with embedded derivatives),
(b)
section 585 (loan relationships with embedded derivatives), and
15
(c)
section 586 (other contracts with embedded derivatives).
(4)
References in this Part to a company being a party to a relevant contract are to
be read in accordance with this section.
579
The accounting conditions
(1)
The accounting conditions for any accounting period are that—
20
(a)
the relevant contract is treated for accounting purposes as a derivative,
(b)
the relevant contract—
(i)
is not so treated just because of not meeting the requirement in
paragraph 9(b) of Financial Reporting Standard 26 issued in
December 2004 by the Accounting Standards Board
25
(requirement for no initial net investment or smaller initial net
investment than comparable types of contract), but
(ii)
is or forms part of a financial asset or liability for accounting
purposes, or
(c)
the relevant contract is not within paragraph (a) or (b), but is within
30
subsection (2).
(2)
A relevant contract is within this subsection if—
(a)
its underlying subject matter is commodities, or
(b)
it is a contract for differences whose underlying subject matter is—
(i)
land,
35
(ii)
tangible movable property, other than commodities which are
tangible assets,
(iii)
intangible fixed assets,
(iv)
weather conditions, or
(v)
creditworthiness.
40
(3)
For the purposes of subsection (1)(a), a relevant contract of a company is
treated for accounting purposes as a derivative for an accounting period if for
that period—

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(a)
it is so treated for the purposes of the relevant accounting standard
used by the company for that period, or
(b)
it would be so treated if the company used the relevant accounting
standard for that period in respect of the contract.
(4)
For the purposes of subsection (1)(b), a relevant contract of a company is or
5
forms part of a financial asset or liability for accounting purposes for an
accounting period if for that period—
(a)
it is or does so for the purposes of the relevant accounting standard
used by the company for that period, or
(b)
it would be or would do so if the company used the relevant accounting
10
standard for that period in respect of the contract.
(5)
In this section “relevant accounting standard” means—
(a)
for any accounting period in relation to which it is required or
permitted to be used, Financial Reporting Standard 25 issued in
December 2004 by the Accounting Standards Board, as from time to
15
time modified, amended or revised, or
(b)
for any accounting period in relation to which it is required or
permitted to be used, any subsequent accounting standard dealing
with transactions which are derivatives, as from time to time modified,
amended or revised.
20
(6)
For the meaning of “underlying subject matter”, see section 583.
580
“Option”
(1)
In this Part “option” includes a warrant.
(2)
References in this Part to an option do not include a contract whose terms—
(a)
provide—
25
(i)
that, after setting off their obligations to each other under the
contract, a cash payment is to be made by one party to the other
in respect of the excess, if any, or
(ii)
that each party is liable to make to the other party a cash
payment in respect of all that party’s obligations to the other
30
under the contract, and
(b)
do not provide for the delivery of any property.
(3)
Subsection (2) does not prevent an option whose underlying subject matter is
currency from being an option.
(4)
But see—
35
(a)
section 652 (introduction to sections 653 to 655),
(b)
section 665 (issuers of securities with embedded derivatives: equity
instruments), and
(c)
section 695 (transfers of value to connected companies),

in which “option” is to be construed as if subsections (2) and (3) were omitted.
40
581
“Future”
(1)
In this Part “future” means a contract for the sale of property under which
delivery is to be made—
(a)
at a future date agreed when the contract is made, and

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(b)
at a price so agreed,

but this is subject to subsection (3).
(2)
For the purposes of subsection (1)(b), a price is agreed when the contract is
made even if—
(a)
the price is left to be determined by reference to the price at which a
5
contract is to be entered into on a market or exchange or could be
entered into at a time and place specified in the contract, or
(b)
in a case where the contract is expressed to be by reference to a standard
lot and quality, provision is made for a variation in the price to take
account of any variation in quantity or quality on delivery.
10
(3)
References in this Part to a future do not include a contract whose terms—
(a)
provide—
(i)
that, after setting off their obligations to each other under the
contract, a cash payment is to be made by one party to the other
in respect of the excess, if any, or
15
(ii)
that each party is liable to make to the other party a cash
payment in respect of all that party’s obligations to the other
under the contract, and
(b)
do not provide for the delivery of any property.
(4)
Subsection (3) does not prevent a future whose underlying subject matter is
20
currency from being a future.
582
“Contract for differences”
(1)
In this Part “contract for differences” means a contract the purpose or
pretended purpose of which is to make a profit or avoid a loss by reference to
fluctuations in—
25
(a)
the value or price of property described in the contract, or
(b)
an index or other factor designated in the contract.
(2)
But none of the following is a contract for differences—
(a)
an option,
(b)
a future,
30
(c)
a contract of insurance,
(d)
a capital redemption policy,
(e)
a contract of indemnity,
(f)
a guarantee,
(g)
a warranty, or
35
(h)
a loan relationship.
(3)
For the purposes of subsection (1)(b), an index or factor may be determined by
reference to any matter.
583
“Underlying subject matter”
(1)
In this Part references to the underlying subject matter of a relevant contract are
40
to be read as follows.
(2)
The underlying subject matter of an option is—
(a)
the property which would fall to be delivered if the option were
exercised, or

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(b)
if the property which would so fall is a derivative contract, the
underlying subject matter of that contract.
(3)
The underlying subject matter of a future is—
(a)
the property which, if the future were to run to delivery, would fall to
be delivered at the date and price agreed when the contract is made, or
5
(b)
if the property which would so fall is a derivative contract, the
underlying subject matter of that contract.
(4)
The underlying subject matter of a contract for differences is—
(a)
if the contract for differences relates to fluctuations in the value or price
of property described in the contract, the property so described, or
10
(b)
if an index or factor is designated in the contract for differences, the
matter by reference to which the index or factor is determined.
(5)
The things which may be the subject matter of a contract for differences
include—
(a)
interest rates,
15
(b)
weather conditions, and
(c)
creditworthiness.
(6)
Interest rates are not the underlying subject matter of a relevant contract if—
(a)
under the terms of that contract—
(i)
the date on which a party to that contract becomes subject to a
20
duty to make a payment is a variable date, and
(ii)
the amount of that payment varies according to the date of
payment, and
(b)
those terms refer to an interest rate only for the purpose of establishing
that amount.
25
(7)
The underlying subject matter of a relevant contract is not treated as being—
(a)
land,
(b)
shares in a company, or
(c)
rights of a unit holder under a unit trust scheme,

just because its underlying subject matter includes income from that kind of
30
property.
Cases where companies treated as parties to relevant contracts
584
Hybrid derivatives with embedded derivatives
(1)
This section applies if—
(a)
a company is a party to a relevant contract which meets the condition
35
in section 579(1)(b) or (c) (contracts not treated for accounting purposes
as derivatives),
(b)
in accordance with generally accepted accounting practice, the
company treats the rights and liabilities under the contract as divided
between—
40
(i)
rights and liabilities under one or more derivatives (“embedded
derivatives”), and
(ii)
the remaining rights and liabilities, and
(c)
a contract consisting of only those remaining rights and liabilities
would be a relevant contract.
45

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Chapter 2 — Contracts to which this Part applies
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(2)
The company is treated for the purposes of this Part—
(a)
as a party to a relevant contract whose rights and liabilities consist only
of those of the embedded derivative, or (if there is more than one
embedded derivative) as a party to relevant contracts each of whose
rights and liabilities consist only of those of one of the embedded
5
derivatives, and
(b)
as a party to a relevant contract whose rights and liabilities are those
within subsection (1)(b)(ii).
(3)
Each relevant contract to which a company is treated as a party under
subsection (2) is treated for the purposes of this Part as an option, a future or a
10
contract for differences depending on what the character of a separate contract
containing the rights and liabilities of the deemed relevant contract would be.
(4)
In this Part “hybrid derivative” means a relevant contract within subsection
(1)(a).
(5)
See also—
15
(a)
section 592 (embedded derivatives treated as meeting condition in
section 591 etc), and
(b)
section 616 (disapplication of fair value accounting for certain
embedded derivatives).
585
Loan relationships with embedded derivatives
20
(1)
This section applies if in accordance with generally accepted accounting
practice a company treats the rights and liabilities under a loan relationship to
which it is a party as divided between—
(a)
rights and liabilities under a loan relationship, and
(b)
rights and liabilities under one or more derivative financial
25
instruments or equity instruments (“embedded derivatives”).
(2)
The company is treated for the purposes of this Part—
(a)
as a party to a relevant contract whose rights and liabilities consist only
of those of the embedded derivative, or
(b)
if there is more than one embedded derivative, as a party to relevant
30
contracts each of whose rights and liabilities consist only of those of one
of the embedded derivatives.
(3)
Each relevant contract to which a company is treated as a party under
subsection (2) is treated for the purposes of this Part as an option, a future or a
contract for differences depending on what the character of a separate contract
35
containing the rights and liabilities of the embedded derivative would be.
(4)
For the corresponding treatment of the rights and liabilities within subsection
(1)(a), see section 415 (loan relationships with embedded derivatives).
(5)
See also—
(a)
section 416 (election for section 415 and this section to apply), and
40
(b)
section 635 (some creditor relationships treated as ones in relation to
which section 415 and this section have effect).
586
Other contracts with embedded derivatives
(1)
This section applies if a company—