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HMRC internal manual

Corporate Finance Manual

Derivative contracts: underlying subject matter: subordinate or small value

Disregard of small or subordinate subject matter

The statutory definition of ‘underlying subject matter’ means that it is not uncommon for derivative contracts to have more than one USM. When the regime was first under discussion, there was concern by taxpayers and representative bodies that some contracts, which were mainly concerned with shares or other excluded subject matters, might be inappropriately brought into an income regime because the contract was couched in terms which gave it a second, minor, subject matter of a non-excluded type. For this reason, the legislation provides that in certain circumstances contracts of this sort can be treated as if their USM consists wholly of excluded types of property.

CTA09/S590 sets out the circumstances in which this applies. There must be a contract which

  • has USM which falls into one or more of the excluded categories, and
  • also has minor subject matter.

The ‘minor subject matter’ must be either subordinate to the excluded USM, or small in value when compared to the USM of the contract as a whole.

If these conditions are fulfilled, the minor subject matter is disregarded. The test of whether the minor subject matter is subordinate, or of small value, is applied at the date on which the company enters into or acquires the relevant contract.

The word ‘small’ is not defined, but if the value of the minor subject matter is 5% or less of the value of the entire subject matter of the contract, HMRC will regard it as being small.

CFM50590 gives an example of how CTA09/S590 works.