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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Derivative contracts: introduction: scope

What the rules cover

Who is chargeable?

The derivative contracts rules apply only to companies within the charge to corporation tax. ‘Company’ is defined at CTA10/Part 24, and includes unincorporated associations. The general provisions for derivative contracts are modified for certain special types of company, such as mutual trading companies (CFM54010), insurance companies (CFM54020), investment and venture capital trusts (CFM54030), and holdings in OEIC, unit trusts or offshore funds (CFM54040).

Companies that are members of a partnership are chargeable on their share of the profits or losses of derivatives held by the partnership (see CFM52700).

CFM50070 tells you where to find guidance on the tax treatment of derivatives held by persons other than companies.

What is chargeable?

The Part 7 CTA09 legislation covers most instruments that are regarded by the market as derivatives. The initial scope of FA02/SCH 26 was wide, and it has expanded since the regime was first introduced. So, for example, if you are looking at the accounts of a company that is a party to interest rate, currency, commodity or credit derivatives, such contracts will come within the derivative contracts regime.

The statutory definition of ‘derivative contract’ is at CTA09/S576. In order to come within the regime, an instrument must satisfy three conditions.

  1. It must be a ‘relevant contract’. It is a relevant contract if it is an option, a future or a contract for differences - all of these being defined terms (CFM50300 onwards). Derivatives that are embedded into other sorts of contract may also be treated as relevant contracts (CFM50410 onwards). (See CFM25000 for an explanation of the accounting treatment of embedded derivatives.)
  2. It must meet an accounting requirement. A relevant contract that is accounted for as a derivative will always pass this test, but there are other ways in which the requirement can be met (CFM50210 onwards).
  3. It must not be excluded because of its underlying subject matter. You will have to think about this rule if the derivative you are looking at involves shares (CFM50730).

You are likely to need to consult the detailed guidance if any of the following apply.

  • You are looking at a contract whose underlying subject matter is wholly shares - see CFM50710 onwards.
  • The contract is not accounted for as a derivative financial instrument, or there is doubt about whether or not it is - see CFM50200 onwards.
  • You are looking at a structured product (a pre-packaged investment strategy) to determine whether it is a derivative contract in itself, or whether it contains a derivative contract.