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HMRC internal manual

Corporate Finance Manual

Derivative contracts: group continuity: transfers on or after 16 March 2005

Effect of CTA09/S625: transfers on or after 16 March 2005

Schedule 7 FA 2005 introduced a significant change into the intra-group transfers for both loan relationships and derivative contracts. The principle behind the change was to make the rule more akin to the rule in TCGA92/S171 where a transfer is treated as being for that consideration which gives rise to neither gain nor loss.

Where the transfer of a derivative contract to another group company takes place on or after 16 March 2005, CTA09/S625 treats the transferor as disposing of the contract for its ‘notional carrying value’. The transferee is treated as acquiring the contract for the same ‘notional carrying value’. For the transferee, this assumption has effect not only in the accounting period in which the transfer occurs, but also in subsequent periods.

‘Notional carrying value’ is defined as the amount that would be the carrying value of the contract in the accounts of the transferor company if a period of account ended immediately before the date on which it ceased to be party to the contract. This does not, however, necessarily equate to the value in the company’s accounts.

‘Carrying value’ is itself a defined term - see CTA09/S702. The carrying value is adjusted where there has been a previous transfer to which Section 625 applies, or where a loan relationship containing an embedded derivative, to which CTA09/S585 applies, is transferred.

CFM53080 gives examples of transfers occurring on or after 31 March 2005.

Section 625 or section 628?

CTA09/S625 applies only where the transferor company accounts for the contract on a historic cost basis. Where it uses fair value accounting in respect of the contract, CTA09/S628 will apply (see CFM53090). Since companies that have adopted IAS 39 or FRS 26 will account for derivative financial instruments at fair value, intra-group transfers to which section 628 applies are likely to become more common.

However, where a derivative is in a hedging relationship, and Regulation 7, 8 or 9 of the Disregard Regulations (see CFM57000 onwards) applies, it is treated for tax purposes as though the company accounted for it on an accruals basis under ‘old UK GAAP’ (CFM20010). In such cases, Regulation 6(12) of the Disregard Regulations ensures that the transfer is treated as being within section 625, not section 628 - see CFM57450.

Transfer pricing

The value at which CTA09/S625 treats the contract as being transferred will not, in general, be the ‘arm’s length price’. The transfer pricing provisions of TIOPA10/Part 4 might potentially apply. CTA09/S625(7) ensures that they do not.