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HMRC internal manual

Corporate Finance Manual

Derivative contracts: bringing amounts into account: trading or non-trading?

Trading and non-trading credits and debits

Trading derivative contracts

A company will have a trading derivative contract if it entered or acquired the derivative contract for the purposes of its trade (CTA09/S573(1)).

A bank or financial trader that sells or deals in derivatives will enter into or acquire such derivative contracts for trade purposes. But equally a company that uses a derivative for purposes that are ancillary to trading operations will satisfy the requirement. Examples are:

  • a manufacturer using a commodity derivative to hedge raw material prices;
  • a company that borrows money for trade purposes, and then enters into an interest rate cap to protect itself from interest rate increases;
  • a company using a credit derivative to hedge the risk of a major customer running into financial difficulties.

The strict test in CTA09/S298(1) for creditor loan relationships - the loan or deposit must be made in the course of activities integral to the company’s trade - has no parallel in the derivative contracts legislation.

Occasionally, a company may be party to one or more derivatives partly for trade and partly for non-trade purposes. For example, a company may hedge assets or liabilities, some of which are held for trade purposes and some of which are not, on a portfolio basis. It may not be possible to link particular derivative contracts with particular assets or liabilities. Since CTA09/S573 applies ‘so far as’ a company is party to a derivative contract for trade purposes, it is possible in such circumstances to apportion credits and debits on an equitable basis between trading and non-trading.

Non-trading derivative contracts

A company will have a non-trading derivative contract if it is not a party to a derivative contract for the purposes of its trade. For example, if

  • it has no trade, such as a pure investment company or a non-trading holding company, or
  • as a trading company, it holds derivative contracts for investment or speculative purposes, or to hedge a non-trading asset or liability, such as a loan taken out to acquire shares in a subsidiary.

A property business is not regarded as a trade for this purpose, nor is a concern treated as a trade under CTA09/S39, such as a mine or railway.