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 2 — Contracts to which this Part applies
282

(a)
is a party to a contract which is neither a hybrid derivative nor a loan
relationship, and
(b)
in accordance with generally accepted accounting practice, treats the
rights and liabilities under the contract as divided between—
(i)
rights and liabilities under one or more derivatives (“embedded
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derivatives”), and
(ii)
the remaining rights and liabilities.
(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
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(b)
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 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
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contract for differences depending on what the character of a separate contract
containing the rights and liabilities of the embedded derivative would be.
(4)
See also section 616 (disapplication of fair value accounting for certain
embedded derivatives).
Other contracts etc treated as derivative contracts
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587
Contract relating to holding in OEIC, unit trust or offshore fund
(1)
This section applies in relation to a relevant contract to which a company is a
party in an accounting period if—
(a)
it is not a derivative contract for the purposes of this Part but for this
section, and
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(b)
its underlying subject matter consists wholly or partly of a relevant
holding in that period.
(2)
This Part has effect—
(a)
for that accounting period, and
(b)
for any succeeding accounting period in which the relevant contract is
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a relevant contract of the company,

as if the relevant contract were a derivative contract.
(3)
For the purposes of this section, the underlying subject matter of a contract
consists wholly or partly of a relevant holding in an accounting period if—
(a)
at any time in that period it consists wholly or partly of—
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(i)
any shares in an open-ended investment company,
(ii)
any rights under a unit trust scheme, or
(iii)
a material interest in an offshore fund within the meaning of
Chapter 3 of Part 6 (see section 489), and
(b)
there is a time in the period when that company, scheme or fund fails
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to meet the qualifying investments test.
(4)
In subsection (3) “meeting the qualifying investments test” has the same
meaning as in section 493 (the qualifying investments test).

Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 2 — Contracts to which this Part applies
283

(5)
See section 18(2)(c)(ii) of F(No.2)A 2005 (section 17(3): specific powers) for the
power to modify the meaning of “relevant holding” for the purposes of this
section by regulations under section 17(3) of that Act (regulations about
authorised unit trusts and OEICs).
(6)
For the way in which credits and debits are to be brought into account where
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this section applies, see section 601 (application of fair value accounting).
(7)
See also—
(a)
section 602 (contract becoming one relating to holding in OEIC, unit
trust or offshore fund), and
(b)
section 660 (company ceasing to be party to contract relating to holding
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in OEIC, unit trust or offshore fund).
588
Associated transaction treated as derivative contract
(1)
This section is to be read as if it were in Chapter 7 (shares with guaranteed
returns etc) of Part 6 (relationships treated as loan relationships etc).
(2)
See, in particular—
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section 526(2) (meaning of “non-qualifying share”), and
section 532 (meaning of “associated transaction” and “the associated
transactions condition”).
(3)
Subsection (4) applies in a case which falls within section 523(1)(b)(ii) (loan
relationships: non-qualifying shares) because the share mentioned in section
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523(1)(a) is a non-qualifying share as a result of the associated transactions
condition being met.
(4)
An associated transaction is treated for the purposes of this Part as a derivative
contract or a transaction in respect of a derivative contract if it is not in fact such
a contract or transaction.
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(5)
For the way in which credits and debits are to be brought into account where
subsection (4) applies, see section 603 (application of fair value accounting).
Exclusions from derivative contracts
589
Contracts excluded because of underlying subject matter: general
(1)
A relevant contract is not a derivative contract for the purposes of this Part if
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its underlying subject matter—
(a)
consists wholly of excluded property (see subsections (2) to (5)), or
(b)
is treated as consisting wholly of such property.
(2)
“Excluded property” means—
(a)
intangible fixed assets,
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(b)
shares in a company other than shares within subsection (3), or
(c)
rights of a unit holder under a unit trust scheme other than a scheme in
relation to which section 490 (holdings in OEICs, unit trusts and
offshore funds treated as creditor relationship rights) has effect.
(3)
The shares within this subsection are—
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Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 2 — Contracts to which this Part applies
284

(a)
shares to which section 524 or 526 (shares subject to outstanding third
party obligations and shares which are non-qualifying shares) applies,
and
(b)
shares in an open-ended investment company in relation to which
section 490 has effect.
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(4)
Subsection (2)(a) applies only in relation to a relevant contract which is an
option or future.
(5)
Subsection (2)(b) and (c) apply only in relation to a relevant contract which—
(a)
meets any of conditions A to E in section 591, and
(b)
is not designed to produce a return which equates in substance to the
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return on an investment of money at a commercial rate of interest.
(6)
Section 590 applies for determining whether the underlying subject matter of a
relevant contract is to be treated as consisting wholly of excluded property.
590
Disregard of subordinate or small value underlying subject matter
(1)
This section applies in relation to a relevant contract if its underlying subject
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matter consists only of—
(a)
excluded property, and
(b)
other underlying subject matter which is—
(i)
subordinate in relation to any of the excluded property, or
(ii)
of small value in comparison with the value of the underlying
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subject matter as a whole.
(2)
The underlying subject matter of the contract is treated for the purposes of this
Part as if it consisted wholly of excluded property.
(3)
For the purposes of this section, whether part of the underlying subject matter
of a relevant contract of a company is subordinate or of small value is to be
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determined by reference to the time when the company enters into or acquires
the contract.
(4)
In this section “excluded property” has the same meaning as in section 589.
591
Conditions A to E mentioned in section 589(5)
(1)
The following are the conditions mentioned in section 589(5).
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(2)
Condition A is that the relevant contract—
(a)
is a plain vanilla contract entered into or acquired by a company
carrying on life assurance business,
(b)
is an approved derivative for the purposes of Rule 3.2.5 of the Insurance
Prudential Sourcebook, and
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(c)
does not meet the condition in section 579(1)(b) (contract which is or
forms part of a financial asset or liability for accounting purposes).
(3)
Condition B is that—
(a)
the relevant contract is entered into or acquired by a company
otherwise than for the purposes of a trade carried on by it,
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(b)
there is a hedging relationship between the contract and—
(i)
an asset of the company which consists of shares or rights of a
unit holder under a unit trust scheme, or

Corporation Tax Bill
Part 7 — Derivative contracts
Chapter 2 — Contracts to which this Part applies
285

(ii)
any share capital of the company or any liability related to share
capital of the company, and
(c)
the relevant contract is not one to which the company is treated as a
party under section 585(2) (loan relationships with embedded
derivatives).
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(4)
Condition C is that—
(a)
the relevant contract is entered into or acquired by a company
otherwise than for the purposes of a trade carried on by it, and
(b)
the relevant contract is an option which is listed on a recognised stock
exchange to subscribe for shares in a company.
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(5)
Condition D is that—
(a)
the relevant contract is entered into or acquired by a company
otherwise than in the course of activities forming an integral part of a
trade carried on by it,
(b)
the relevant contract is—
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(i)
an option to acquire shares in a company, or
(ii)
a future requiring delivery of shares in a company,
(c)
the relevant contract is not one to which the company is treated as a
party under section 585(2), and
(d)
the shares to be acquired or delivered—
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(i)
constitute a substantial shareholding within the meaning of
paragraph 8 of Schedule 7AC to TCGA 1992 (meaning of
“substantial shareholding”), or
(ii)
would do so if acquired or delivered.
(6)
Condition E is that—
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(a)
the company which is a party to the relevant contract has a hedging
relationship between—
(i)
the relevant contract, and
(ii)
an asset or liability representing a loan relationship which is
treated as mentioned in section 585(1) (loan relationships with
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embedded derivatives), and
(b)
each relevant contract to which the company is treated as a party under
section 585(2) in the case of that loan relationship is a derivative
contract to which any of the provisions in subsection (7) applies.
(7)
The provisions mentioned in subsection (6)(b) are—
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(a)
section 645 (creditor relationships: embedded derivatives which are
options),
(b)
section 648 (creditor relationships: embedded derivatives which are
exactly tracking contracts for differences),
(c)
sections 653 to 655 (issuers of securities with embedded derivatives:
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deemed options), and
(d)
section 658 (issuers of securities with embedded derivatives: deemed
contracts for differences).
(8)
For the cases in which sections 653 to 655 and section 658 apply, see sections
652 and 656 respectively.
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