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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Derivative contracts: accounting conditions: contracts for differences

Contracts for differences satisfying CTA09/S579(2)

CTA09/S579(2)(b) makes it clear that contracts for differences (CFD) whose underlying subject matter is land, tangible moveable property (apart from commodities), intangible fixed assets, weather or creditworthiness are derivative contracts. This is to ensure that certain sorts of derivative, particularly those with non-financial subject matters, come within the Part 7 CTA09 regime even though there may be doubt about whether they are treated as derivatives for accounting purposes.

For example, many property derivatives, such as those based on an index of property values, will be treated as derivatives for accounting purposes, and will therefore satisfy the main test at S579(1)(a). But the inclusion of land (and tangible moveable property, to take account of chattels within buildings) in S579(2)(b) puts the position of property derivatives beyond doubt.

S579(2)(b) will cover some contracts which are often called futures (or, more rarely, options), such as the weather futures. A contract whose underlying subject matter is not capable of being delivered cannot be an option or a future for the purposes of Part 7 - see CFM50340 and CFM50360. It must therefore be a CFD.

On the other hand, contracts that are options or futures as defined in the legislation (S580 and S581) are not covered by S579(2)(b). For example, suppose that a building company holds an option to purchase a tract of land to develop as housing. Since the contract may result in an actual conveyance of land (even if it contains a clause allowing cash settlement in particular circumstances) it will be an option for Part 7 purposes, and not a CFD. It is highly unlikely that such a contract will be accounted for as a derivative financial instrument nor does it come within S579(2)(b) so it is excluded from Part 7.