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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Derivative contracts: hedging: regulation 6B: transfers within groups: example

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

Intra-group transfers of contracts: example

Y Ltd and Z Ltd are two companies in the same group. Y Ltd makes regular purchases of wheat, and it hedges the commodity price risk by entering into wheat futures contracts. In 20X8, there is a reorganisation of the group’s trading activities, with the result that, from 1 July 20X8, wheat purchases fall to be made by Z Ltd. At 30 June 20X8, all of the futures contracts held by Y Ltd are novated to Z Ltd.

The transfers take place at fair value. There is a hedging relationship between each of these contracts and one or more forecast purchases of wheat.

Both Y Ltd and Z Ltd use fair value accounting for the futures contracts. Y Ltd has elected into regulations 7, 8 or 9 but Z Ltd has not done so.

Under regulation 8, fair value changes in the wheat futures positions shown in the accounts of Y Ltd are disregarded for tax purposes. On transfer, regulation 6B(1) ensures that it is CTA09/S625, not S628, that governs the transfer.

Y Ltd does not bring in any debits or credits as a result of the transfer, on the basis of S625. Even though Z Ltd has not made an election, regulation 8 applies to the transferred contracts. For tax purposes, the contracts held by Z Ltd are treated as though they were ‘off balance sheet’, and fair value movements are disregarded. Nor are any debits or credits brought in by Z Ltd as a result of the transfer. When Z Ltd makes the forecast purchase of wheat (and as a result expensed to profit or loss), the disregarded amounts are brought into account by Z Ltd in accordance with regulation 10. This includes fair value changes that have occurred while Y Ltd held the contract - this follows from S625, which deems Z Ltd to have acquired the contract for a consideration equal to Y’s acquisition cost.

The Disregard Regulations will not apply to any new wheat future contracts entered into by Z Ltd after 30 June 20X8 as Z Ltd has not made an election into them. Fair value profits and losses on such contracts will be brought into account as they are recognised in the accounts.

A derivative could potentially be transferred between group companies (as above) but the hedged item remain with the original company. In this situation, the treatment above will still apply and a profit or loss will not crystallise on the transfer by virtue of S625. The amount that has been disregarded in the transferor will instead crystallise in the transferee company.