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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Derivative contracts: tax avoidance: amounts not fully recognised for accounting purposes

This guidance applies for accounting periods beginning before 6 December 2010

Amounts not fully recognised for accounting purposes

Sections CTA09/599A and 599B

Finance Act 2009 inserted two new anti-avoidance provisions to deal with cases where the accounting treatment does not fully bring into account the full amount of profits and losses on certain transactions involving derivative contracts. The new sections apply to accounting periods ending on or after 22 April 2009 and, in relation to any periods beginning before that date, to only bring into account amounts relating to any time after that date.

These provisions are, essentially, identical to the legislation relating to amounts not being fully recognised for accounting purposes involving loan relationships at CTA09/S311 and S312 (see CFM33120). The difference being that in this case the transactions involve derecognition of profits and losses on derivative contracts rather than loan relationships.

Where inflows of cash from an asset are precisely mirrored by cash outflows from a liability, generally accepted accounting practice may permit or require the whole or part of the income arising on those assets or liabilities to be derecognised. Consequently, and without any special provisions to the contrary, amounts will not be brought into account.

Example

A UK parent (‘Parent’) capitalises a subsidiary company (‘SPV’) and SPV uses the cash to purchase a derivative contract.

SPV issues shares to Parent with terms that result in a return to Parent that mimics the performance of the derivative contract held by SPV. If substantially all of the risks and rewards of the derivative asset have been transferred to the parent, and SPV has assumed an obligation to pay over cash flows from the derivative in accordance with IAS 39.19, the derivative contract asset (and any profits or losses arising on it) will be derecognised by SPV. SPV will not, therefore, account for any gains on the derivative contract and will avoid bringing any gains on the derivative contract into account for tax purposes.

Effect of CTA09/S599A and S599B

Where a gain on a derivative contract is not recognised or is offset (for example, the gain is offset by an equal and opposite dividend payment), CTA09/S599A and S599B will ensure that the gain is still brought into account for tax purposes. If debits are brought into account they must not exceed the credits also brought into account under these provisions.