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HMRC internal manual

Corporate Finance Manual

Derivative contracts: accounting conditions: commodity contracts

Contracts specifically included: commodity contracts

Contracts to buy or sell goods which can only be settled by physical delivery of the goods are outside the scope of FRS 26. If, however, the contract is capable of being settled in cash, it becomes necessary to know whether or not the company holds it for the purpose of obtaining or selling goods in accordance with its expected business requirements.

For tax purposes, it is not always easy to ascertain whether a company has entered into a commodity future or option in order to buy or sell goods as part of its normal business, or whether it intends the contract as a hedge (or holds it speculatively). So, there is a special rule at S579(2)(a) which ensures that all commodity contracts pass the accounting test. This applies whether they are cash settled or not.

This will mean that some contracts to buy or sell goods for trade purposes will come within the derivative contract regime. Normally, this will have no effect on the company’s taxable profits and companies will not be expected to identify such contracts separately in their computations.

See the example at CFM50250.

If a company entered into a commodity contract for a purpose which was not among the business or other commercial purposes of the company, the unallowable purposes provisions in CTA09/S690 (see CFM56020) may apply. Section 690 would only be relevant if the contract were a derivative contract.