Derivative contracts: group continuity: novations and other indirect replacements
‘Directly or indirectly replaces’
As with loan relationships, the group neutrality provision extends to the case where, rather than the transferee company directly replacing the transferor as party to the contract, it enters into a new but ‘equivalent’ contract with the counterparty.
With derivative contracts, indirect replacement will be the norm rather than the exception, since derivatives are almost always transferred by a process of novation. In legal terms, the existing parties to the contract (the transferor company and the counterparty) terminate their contract, in consideration of which the counterparty enters into a new contract with the transferee company.
Under CTA09/S627 the rights and liabilities under the new contract must be equivalent to those under the old contract. Unlike the corresponding loan relationships provision (CTA09/S338), CTA09/S627 puts no gloss on the meaning of ‘equivalent’.
The ‘equivalence’ requirement was considered in a First Tier Tax Tribunal Decision, HBOS Treasury Services Plc (now HBOS Treasury Services Ltd) v HMRC Commissioners  UKFTT 261, TC208. HMRC staff should seek advice from CTIAA (Financial Products Team) where there is doubt about whether old and new contracts are equivalent.
The group continuity rule was amended by FA 2003 to make it clear that it applies to novations. The amendment applies to transfers occurring on or after 9 April 2003. HMRC’s view is that the rule as originally enacted, applied to novations. If it is claimed that that the rule does not apply to a transfer before 9 April 2003 because a novation was involved, HMRC staff should consult CTIAA (Financial Products Team).