CFM52038 - Derivative contracts: the matters and computational rules: transitional rules for changes made by F(2)A15

F(2)A15/SCH7/PARAS120-129

The changes made to the derivative contracts provisions by F(2)A15 affected not only the time at which amounts were to be brought into account for tax, but also, to a more limited extent, the scope. Further, in some cases adjustments could be very large, so transitional amounts were spread over several accounting periods. Accordingly, there is some complexity in the rules. The pattern of the rules follows that for loan relationships.

Amounts previously recognised in OCI

Under the rules before F(2)A15, amounts initially recognised as items of “other comprehensive income” OCI would normally be taxable unless for example, this disregards regulations provided otherwise (SI2004/3256). Afterwards, such amounts would not be taxable unless or until transferred to profit or loss, or a special rule such as S604A applied, see CFM51036.

F(2)A15/SCH7/PARA120 deals with the scenario where

  • Amounts in respect of a derivative contracts matter (S306A, CFM51032)have been recognised in OCI accordance with GAAP;
  • These amounts were not subsequently transferred to become items of profit or loss in an accounting period beginning before 1 January 2016; and
  • The amounts were brought into account for CT in such a period.

However, FX amounts already recognised under regulations made under CTA09/S606 are not brought in a second time, under the transitional rules - F(2)A15/SCH7/PARA122.

In working out amounts it is assumed that the accounting policy used in the last period beginning before 1 January 2016 was also applied in earlier periods, unless that earlier policy complied with GAAP.

An adjustment is then computed, on a just and reasonable basis, so as to avoid amounts being brought into account twice.

The adjustment is then brought into account spread over 5 transitional years as set out in PARA121:

  • Year 1: 40%
  • Year 2: 25%
  • Year 3: 15%
  • Year 4: 10%
  • Year 5:10%

Where accounting periods do not coincide with these years, amounts are apportioned on a day count basis.

If, at a subsequent time, there is also a change of accounting basis, F(2)A15/SCH7/PARA123 requires that the change in accounting basis provisions (see CFM52030 are applied first before the transitional rules.

If a company ceases to be in the charge to CT or a winding up process commences, PARA 124 requires any transitional amounts not yet brought into account to be picked up in the accounting period immediately before the event.