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HMRC internal manual

Corporate Finance Manual

Derivative contracts: partnerships: derivative contracts held by partnerships

Partnerships and derivative contracts: computing credits and debits

Although a partnership is not a legal person in England and Wales (it is in Scotland and some other jurisdictions), it may still be regarded as entering into an option, future or swap. In other words, it can be regarded as a party to an instrument that would be a derivative contract within Part 7 were the partnership a company. Where this happens, a company which is a partner must compute debits or credits from the derivative contract in accordance with CTA09/S619 - 621.

These provisions follow the corresponding rules in CTA09/S380-381 (CFM36000+) for partnerships that are party to a loan relationship. In the absence of any special provision, a company member of a partnership will compute the profits or losses of its trade, profession or business in accordance with CTA09/S1259 (see CT2350+). A computation is made as if the partnership were a company, and a proportion of the profit or loss so computed is allocated to the company, in line with the company’s profit share.

But CTA09/S619 disapplies S1259 where credits or debits from derivative contracts are concerned. Instead, each company partner is treated as effectively having a separate derivative contract. You compute the credits or debits to be brought in by any particular company partner in accordance with CTA09/S620:

  • Imagine that the derivative contract in question is held by that company partner, for the purposes of the trade, profession or business which the company carries on. Treat everything which the partnership does in relation to the derivative contract (such as making or receiving payments) as being done by the company.
  • Work out, on this assumption, what credits and debits arise on the derivative contract (the total credits and debits). You apply any rules that depend on the status of a party to a contract by reference to the partner company’s status (for example, whether it holds the contract for the purposes of a trade or a financial trade). You ignore the status, if different, of any other company partner.
  • Apportion those credits and debits to the company partner, on the basis of that partner’s appropriate share. Appropriate share means according to the way in which profits or losses would be shared between company partners under CTA09/S1259. It is based on the company’s interest in the partnership during the accounting period. For example, a company entitled to a 50% share of partnership profits in the accounting period in question would bring into its tax computation 50% of the total credits and debits.

How far do you take the deeming?

The purpose of CTA09/S620 is to enable the company partner to ‘stand in the shoes’ of the partnership and bring into account an appropriate share of the partnership’s profit or loss on the contract. The deeming required by CTA09/S620(2) - (3) should be taken far enough to achieve this statutory purpose, but no further.

Thus, for example, if the partnership and the company partner have different accounting policies in respect of derivatives, there is no need to hypothesise what debits or credits the company partner might bring into account if it really did hold the derivative. It is sufficient to compute the ‘total credits and debits’ on the accounting basis used by the partnership.

There is an example at CFM52720, which illustrates this.

Similarly, if the company partner has a different functional currency from the partnership, the ‘total credits and debits’ will include any exchange gains or losses that the partnership would bring into account. There is no need to compute what exchange differences would (or would not) arise were the company partner actually to hold the derivative.

Limited liability partnerships

Partnership in this context includes a limited liability partnership (LLP), provided that the LLP carries on a business with a view to profit, and is not in liquidation or being wound up. This follows from CTA09/S1273.