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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: regulation 9 elections

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

Electing out of regulation 9

Regulation 9 permits a company to preserve the type of hedge accounting possible under ‘old’ UK GAAP (where FRS 26 is not applied) where a synthetic debt asset or liability was created by combining the terms of the swap with the debt instrument. This treatment reduces tax volatility compared with IAS accounting, but at the cost of computational complexity, in particular for undesignated hedges. Companies may therefore elect - under regulation 6(5) of the Disregard Regulations - that regulation 9 will not apply to its interest rate contracts.

If such an election is made then there are three possible outcomes for interest rate contracts that meet the conditions in regulation 9(1):

  • in a limited number of cases, the election will have no effect with the result that regulation 9 treatment remains mandatory. CFM57400.
  • where regulation 9 treatment is not mandatory, but the contract is a designated cash flow hedge, the tax treatment will be governed by regulation 9A. CFM57420.
  • In all other cases, normal CTA09/PART7 rules will apply. That means that all fair value profits and losses on the derivative contracts will potentially be subject to tax.

Regulation 6(5) elections

The effect of the regulation 6(5) election is therefore to provide an intermediate position between normal CTA09/PART7 rules and regulation 9 treatment. If a company has no designated cash flow hedges, nor any contracts that are forced to remain within regulation 9, then normal CTA09/PART7 rules will apply in full.

Regulation 6(5B) elections

Alternatively, a company may elect under regulation 6(5B). This further limits the number of cases falling within the first bullet point above, where regulation 9 treatment still applies. CFM57400 gives further detail, and CFM57410 summarises the effects of both elections, and sets out the time limits.