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HMRC internal manual

Corporate Finance Manual

Derivative contracts: introduction: overview of regime

What are the derivative contracts rules all about?

Companies often use derivatives such as options, futures and swaps to mitigate or hedge, commercial risks they face as a result of movements in interest rates, foreign currency exchange rates, commodity prices or similar factors. Some companies may trade in derivatives, while others may hold derivatives as an investment or speculation. All of these activities are likely to generate profits or losses. This section of the Corporate Finance Manual sets out how these profits or losses are taxed.

If you are unfamiliar with derivatives and their commercial uses, you may find it helpful to read the background material on derivative contracts at CFM13000 onwards.

The ‘derivative contracts rules’ is a shorthand term for the legislation in Part 7 of the Corporation Tax Act 2009. It was previously found in FA02/SCH26. There is also secondary legislation that is relevant to derivative contracts, particularly the ‘Disregard Regulations’ (the Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) Regulations 2004, SI 2004/3256).

This guidance describes the rules as they currently stand. Important changes to the provisions were made by FA 2004, which applied to periods of account beginning on or after 1 January 2005. Some further changes were subsequently made by statutory instrument. If you need guidance on earlier versions of the derivative contracts rules, you can find this at CFM83000 to CFM85000, together with a brief summary of how the legislation has developed.

This introductory section summarises the main features of the derivative contracts regime. If you deal mainly with small or medium-sized companies, whose use of derivatives is straightforward, you may not need to read anything more than this section. It contains links to the detailed guidance that you need to consult in more complex situations.