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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Derivative contracts: hedging: pre-2015: regulations 7 and 8 election

This guidance applies to periods of account starting before 1 January 2015.  

Electing out of regulations 7 and 8

Elections, whether under regulation 6(3) or 6(3A), must have been made in writing to HMRC.

Time limits: Regulation 6(3)

The time limit for elections is the later of

  • the day before the start of the company’s first accounting period to which regulations 7 and 8 applies to the company, and
  • 1 October 2005.

If a company does not use fair value accounting in its first accounting period beginning on or after 1 January 2005, but starts to use fair value accounting in a later period, it must - where it has contracts to which regulations 7 or 8 apply - elect before the start of that later period. For example, if a company adopts FRS 26 in its period of account starting on 1 April 2006, it must elect on or before 31 March 2006.

Some companies may adopt IAS 39 or FRS 26, but have no derivative contracts to which regulations 7 or 8 might apply. In such a case, the company can elect out of regulations 7 and 8 within 90 days of it first becoming party to a currency, commodity or debt contract to which one of these regulations might apply, or by 31 March 2006 if that is later. For example, a company that adopted FRS 26 for its period of account from 1 January to 31 December 2005, but only acquired its first regulation 7 or 8 contract in November 2005, must have elected before 31 March 2006.

This provision will also apply to any newly-incorporated company that adopts fair value accounting in its first period of account. For example, suppose that a company incorporated on 15 November 2007, and using FRS 26 from the outset, acquires currency contracts hedging a forecast transaction on 18 November 2007. Any election under regulation 6(3) must be made within 90 days of 18 November 2007.

Once made, an election can be revoked by notice in writing. A revocation has effect from the date of the notice for any contracts that the company subsequently acquires, but it does not affect the tax treatment of contracts already held at that date.

Time limits: Regulation 6(3A)

Regulation 6(3A) was introduced by SI 3236/2006, and has effect for periods of account beginning on or after 1 January 2006 and ending on or after 27 December 2006. Unlike a Regulation 6(3) election, the election is irrevocable.

An election under Regulation 6(3A) automatically revokes any earlier election that the company has made under Regulation 6(3).

The time limit for the election is 1 April 2007 - that is, the election must, in general, be made before that date. However, as with elections under regulation 6(3), it may be made later in certain circumstances:

  • If the company only begins to use fair value accounting in a period of account starting on or after 1 April 2007, it must elect before the start of the first period for which it adopts fair value accounting.
  • But if it holds no derivative contracts within Regulation 7 or Regulation 8, it must make the election within 90 days of first acquiring such contracts.

Regulation 6 also contains rules about the application of elections to groups of companies.

Effect of a regulation 6(3) election

An election under regulation 6(3) applies to all of a company’s derivative contracts that would otherwise meet the conditions of regulation 7(1) and regulation 8(1). The normal rules of CTA09/PART7 will apply to such contracts. Credits or debits, whether to equity or to profit and loss account, are taxed as they occur.

Effect of a regulation 6(3A) election

An election under regulation 6(3A) applies the treatment given by regulation 9A (CFM57072) to any contract held by the company that satisfy the regulation 7 or 8 conditions. Where such a contract is the hedging instrument in a hedge which is accounted for as a cash flow hedge in accordance with IAS 39 or FRS 26, it will satisfy the conditions in regulation 9A(1). As a result, the statutory disregard under regulation 9A(1) of initial credits or debits to reserves will apply. Amounts are brought into account for tax purposes only when they are recycled, either to profit or loss account or to a fixed asset or liability account.

Regulation 7 or 8 contracts within undesignated or fair value hedges will not satisfy the conditions in regulation 9A(1). Thus regulation 9A(1) does not result in any debits or credits being disregarded. The normal rules of CTA09/PART7 will apply, and fair value changes on the contracts will be recognised as they occur.

Where a company makes an election under regulation 6(3A), any previous election it has made under regulation 6(3) is automatically revoked. This is because the two elections provide for alternative tax treatments.