House of Commons portcullis
House of Commons
Session 2008 - 09
Internet Publications
Other Bills before Parliament

Corporation Tax Bill


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

277

 

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—

(a)   

is a relevant contract (see sections 577 and 578),

5

(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

any other provision of the Corporation Tax Acts.

10

(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”.

577     

“Relevant contract”

15

(1)   

In this Part “relevant contract” means—

(a)   

an option,

(b)   

a future, or

(c)   

a contract for differences.

(2)   

For the meaning of “option”, “future” and “contract for differences”, see

20

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

references to a relevant contract entered into or acquired by the company (but

see subsection (3)).

25

(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

(b)   

subject to the liabilities under it.

(3)   

For particular cases where companies are treated as parties to relevant

30

contracts, see—

(a)   

section 584 (hybrid derivatives with embedded derivatives),

(b)   

section 585 (loan relationships with embedded derivatives), and

(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

35

be read in accordance with this section.

579     

The accounting conditions

(1)   

The accounting conditions for any accounting period are that—

(a)   

the relevant contract is treated for accounting purposes as a derivative,

(b)   

the relevant contract—

40

 
 

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

278

 

(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

(requirement for no initial net investment or smaller initial net

investment than comparable types of contract), but

5

(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

subsection (2).

(2)   

A relevant contract is within this subsection if—

10

(a)   

its underlying subject matter is commodities, or

(b)   

it is a contract for differences whose underlying subject matter is—

(i)   

land,

(ii)   

tangible movable property, other than commodities which are

tangible assets,

15

(iii)   

intangible fixed assets,

(iv)   

weather conditions, or

(v)   

creditworthiness.

(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

20

that period—

(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.

25

(4)   

For the purposes of subsection (1)(b), a relevant contract of a company is or

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

30

(b)   

it would be or would do so if the company used the relevant accounting

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

35

December 2004 by the Accounting Standards Board, as from time to

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,

40

amended or revised.

(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—

45

(a)   

provide—

 
 

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

279

 

(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

5

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—

10

(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.

15

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

(b)   

at a price so agreed,

20

   

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

contract is to be entered into on a market or exchange or could be

25

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.

(3)   

References in this Part to a future do not include a contract whose terms—

30

(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

(ii)   

that each party is liable to make to the other party a cash

35

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

currency from being a future.

40

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—

(a)   

the value or price of property described in the contract, or

45

 
 

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

280

 

(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,

(c)   

a contract of insurance,

5

(d)   

a capital redemption policy,

(e)   

a contract of indemnity,

(f)   

a guarantee,

(g)   

a warranty, or

(h)   

a loan relationship.

10

(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

to be read as follows.

15

(2)   

The underlying subject matter of an option is—

(a)   

the property which would fall to be delivered if the option were

exercised, or

(b)   

if the property which would so fall is a derivative contract, the

underlying subject matter of that contract.

20

(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

(b)   

if the property which would so fall is a derivative contract, the

underlying subject matter of that contract.

25

(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

(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.

30

(5)   

The things which may be the subject matter of a contract for differences

include—

(a)   

interest rates,

(b)   

weather conditions, and

(c)   

creditworthiness.

35

(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

duty to make a payment is a variable date, and

(ii)   

the amount of that payment varies according to the date of

40

payment, and

(b)   

those terms refer to an interest rate only for the purpose of establishing

that amount.

(7)   

The underlying subject matter of a relevant contract is not treated as being—

 
 

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

281

 

(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

property.

5

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

in section 579(1)(b) or (c) (contracts not treated for accounting purposes

10

as derivatives),

(b)   

in accordance with generally accepted accounting practice, the

company treats the rights and liabilities under the contract as divided

between—

(i)   

rights and liabilities under one or more derivatives (“embedded

15

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.

(2)   

The company is treated for the purposes of this Part—

20

(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

derivatives, and

25

(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

contract for differences depending on what the character of a separate contract

30

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—

(a)   

section 592 (embedded derivatives treated as meeting condition in

35

section 591 etc), and

(b)   

section 616 (disapplication of fair value accounting for certain

embedded derivatives).

585     

Loan relationships with embedded derivatives

(1)   

This section applies if in accordance with generally accepted accounting

40

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

 
 

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

282

 

(b)   

rights and liabilities under one or more derivative financial

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

5

(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

10

contract for differences depending on what the character of a separate contract

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—

15

(a)   

section 416 (election for section 415 and this section to apply), and

(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—

20

(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

25

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

30

(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

35

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

40

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—

 
 

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

283

 

(a)   

it is not a derivative contract for the purposes of this Part but for this

section, and

(b)   

its underlying subject matter consists wholly or partly of a relevant

holding in that period.

(2)   

This Part has effect—

5

(a)   

for that accounting period, and

(b)   

for any succeeding accounting period in which the relevant contract is

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

10

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—

(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

15

Chapter 3 of Part 6 (see section 489), and

(b)   

there is a time in the period when that company, scheme or fund fails

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).

20

(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

25

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

30

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—

35

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

40

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.

45

 
 

 
previous section contents continue
 
House of Commons home page Houses of Parliament home page House of Lords home page search page enquiries

© Parliamentary copyright 2009
Revised 6 February 2009