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HMRC internal manual

Corporate Finance Manual

Derivative contracts: hedging: electing into the Disregard Regulations

This guidance applies to periods of account starting on or after 1 January 2015.  

Electing into the Disregard Regulations

As explained at CFM57071, the default position of following amounts in profit or loss provides a simple approach for companies. However, in certain case this approach can give rise to significant tax volatility - particularly in respect of undesignated hedges and where there is a significant hedge ineffectiveness. Companies can, if they choose, elect into regulations 7, 8 and 9.

Regulations 7, 8 and 9 reduce tax volatility by disregarding fair value movements on particular derivative contracts for tax purposes. But this reduction comes at a price: the company’s tax computations will be more complex, because the regulations require a departure from the accounts figures.

Regulation 6A provides for companies to elect for alternative tax treatments.

Regulation 6A election

A company may elect under regulation 6A that either regulation 7, 8 and 9 apply to its relevant contracts, provided the conditions are satisfied. Many companies may wish for all of regulations 7,8 and 9 to apply to its hedging derivative contracts. However, it is permissible to make the election in respect of any combination of these three regulations as long as this is clear from the election.

A company cannot choose different treatments for the same type of contract. If a company held various currency contracts, for example, it could either not make an election (and adopt a regulation 9A approach) or elect into regulation 7 (and disregard fair value movements on all currency contracts held which meet the relevant conditions). It can’t elect into regulation 7 for only some of the contracts.