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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Derivative contracts: chargeable gains on derivatives: carry back of losses

Carry back of net losses on certain derivative contracts

CTA09/S663 allows capital losses accruing on derivative contracts in an accounting period (‘the loss period’) to be carried back against gains on derivative contracts in earlier periods (‘the gains period’), where the gains period falls wholly or partly within the period of two years immediately before the start of the loss period.

For example, suppose that a company has capital losses on its derivative contracts in its accounting period year ended 31 December 2008. If its previous accounting periods were 1 January 2006 to 31 December 2006, and 1 January 2007 to 31 December 2007, it could

  • carry back the 2008 losses against eligible gains in year ended 31 December 2007 (CFM55030 describes how the eligible gains are computed), and
  • carry back any losses that remain against eligible gains in year ended 31 December 2006.

Relief must be given as far as possible for the later period before any gains are carried back to the earlier period.

Suppose that, instead, the company had prepared accounts for an 18-month period ending on 31 December 2008, so that its previous accounting periods were 1 July 2005 to 30 June 2006, 1 July 2006 to 30 June 2007, and 1 July 2007 to 31 December 2007.

The company could carry back capital losses from year ended 31 December 2008 to (in order of priority) period ended 31 December 2007; period ended 30 June 2007; and period ended 30 June 2006. However, only 6 months of the 12-month period ended 30 June 2006 falls within the two years preceding 1 January 2008, the start of the loss period. Eligible gains are therefore time-apportioned: since 183 days of the gains period falls within the two-year period, losses can be set off against 183/365 of the eligible gains for the period.

The carry-back must be claimed. The company has two years from the end of the loss period in which to make a claim. It does not have to carry back the whole of its net derivative contracts loss for the period - the claim can be for a part only (see examples at CFM55070).