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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
Updated
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Derivative contracts: hedging: regulation 8

This guidance applies to periods of account starting on or after 1 January 2015 where the company has elected for regulation 8 to apply. 

Commodity contracts hedging forecast transactions

Regulation 8 applies to commodity contracts and debt contracts. It is similar to regulation 7. In cases where a company has elected for regulation 8 to apply, the regulation will have effect when the following conditions are satisfied:

  • there is a hedging relationship between a commodity contract or debt contract (or part of it), and a forecast transaction or firm commitment (‘the hedged item’) of the company; and
  • fair value profits or losses on the hedged item are not brought into account for the purposes of corporation tax. Here ‘fair value profits or losses’ takes its normal meaning rather than the definition in regulation 2(1) which is applicable only to derivatives and loan relationships.

A commodity contract is one whose underlying subject matter is commodities; a debt contract is one whose underlying subject matter is a loan relationship (for example, an option or future over gilts). But in neither case will regulation 8 apply if the contract is an ‘interest rate contract’ as defined by regulation 9(4). If the contract comes within regulation 9, that regulation takes priority.

Where a contract comes within regulation 8, fair value changes on the derivative contract are disregarded. If only part of the contract comes within the regulation, a proportionate part of the fair value profits or losses is disregarded. Regulation 10 applies to bring these amounts back into account (CFM57210).

Transitional amounts arising on first-time adoption of IFRS, New UK GAAP, or FRS 26 under Old UK GAAP, whether prior period adjustments or amounts within CTA09/S613, form part of the fair value profits or losses that are disregarded for under regulation 8, just as they are for regulation 7 (CFM57130).