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HMRC internal manual

Corporate Finance Manual

From
HM Revenue & Customs
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Derivative contracts: bringing amounts into account: expenses

Expenses relating to derivative contracts

CTA09/S595(4) sets out the scope of the expenses to be brought into account for tax purposes. They must be incurred directly on one of four activities specified in the legislation. Since CTA09/S595(3)(b) covers expenses incurred either ‘under’ or ‘for the purposes of’ a company’s derivative contracts, it is not necessary to decide whether the payment is made under the contractual terms of the derivative, or as part of a separate contract.

The following table sets out the four types of expenses - the examples are for illustration only, and do not exhaust the possibilities.

| Expense | Examples | || | Bringing a derivative contract into existence. | * Fee or commission charged by a bank for an interest rate swap. * Paying a premium for an option. * Costs of checking the credit status of the counterparty. | | Entering into, or giving effect to, a related transaction. | * Costs directly incurred in delivering a financial or non-financial asset where a contract is settled by physical delivery. * Legal fees relating to the novation of a derivative contract. | | Making a payment under a derivative contract or related transaction. | * Bank charges for making cash settlement payments or swap payments. | | Pursuing payments due under a derivative contract or related transaction. | * Solicitor’s fees incurred in enforcing rights under a derivative contract. |

In a large number of cases, someone entering into a derivative contract will need to provide security to the other party. For example, someone buying or selling exchange-traded futures or options will need to put up margin. A company entering into an over-the-counter contract may need to provide collateral, or a guarantee, or both. Incidental costs which are directly incurred in providing such security, for example, a guarantee fee, or legal costs for entering into an ISDA Credit Support Deed, are allowable under CTA09/S595(4)(a).

Expenditure is not allowable under the derivatives contract rules if it is not directly related to a specific derivative transaction. Examples are:

  • costs of general advice on risk management;
  • costs of becoming a member of a futures or options trading exchange.

Abortive expenditure

CTA09/S607 extends the scope of allowable expenses by providing that, if a company

  • incurs expenditure in connection with entering into a derivative contract, or giving effect to obligations that might arise under it, and
  • if the company actually entered into the derivative contract or related transaction, the expenditure would be allowable under CTA09/S595(3)(b),

those expenses are allowable, whether or not the company ultimately enters into the contract or related transaction. This means that expenditure may be allowable even if it proves abortive.