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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Derivative contracts: exclusions from regime: contracts changing status before 30 December 2006

Contracts that become derivative contracts before 30 December 2006

CTA09/SCH2/PARA93 (previously FA02/SCH26/PARA4D) is a transitional provision that applies where a contract, that was previously a chargeable asset, becomes a derivative contract before 30 December 2006. Before that date, no provision was in force that would deem a disposal to have occurred at the time of the ‘change in status’. So, without specific legislation, it would be unclear how any gain or loss that arose while the contract was a chargeable asset should be taxed or relieved.

Para 93 disapplies the provision which gives the derivative contracts rules priority over any other taxing regime. It is therefore possible, when the company ceases to be party to the contract, to compute the capital gain or loss that has accrued over the company’s entire period of ownership. But Para 93 requires an adjustment to be made to the acquisition cost, so as to exclude from the gain or loss any amounts that have already been taxed or relieved under the derivative contracts legislation.

Specifically, the company must compute an amount G and an amount L. G is the sum of the credits brought into account under the derivative contracts rules, both in the accounting period in which the disposal occurs and in any previous accounting periods. L is a similar aggregate of debits.

If G is greater than L (in other words, the company has made an aggregate profit for derivative contracts purposes), the amount of the excess is added to the acquisition costs allowed for capital gains purposes under TCGA92/S38(1)(a). If, on the other hand, L exceeds G (the company has made an overall loss), the amount of that loss is deducted from the acquisition cost.

There will be cases where the ‘derivative contracts loss’ falling to be deducted from the acquisition cost will exceed the acquisition cost. (This is particularly likely to apply where a future or contract for differences has nil acquisition cost.) The amount that cannot be deducted from the acquisition expenditure is then added to the disposal proceeds.

Other transitional provisions

The changes made to the derivative contracts rules by SI 2005/646, which had effect for periods of account beginning on or after 1 January 2005 and ending on or after 16 March 2005 meant that many equity derivatives, which were formerly chargeable assets, became derivative contracts. Paragraphs 91 and 92 of CTA09/SCH2 provide transitional rules for such contracts. Para 93 does not apply to cases falling with Para 91 or Para 92.