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HMRC internal manual

Corporate Finance Manual

Derivative contracts: hedging: electing out of the Disregard Regulations: transfers of contracts: example

Intra-group transfers of contracts: example

Y Ltd and Z Ltd are two companies in the same group. Y Ltd makes regular sales of wheat, and it hedges the commodity price risk by entering into wheat futures contracts. In 2008, there is a reorganisation of the group’s trading activities, with the result that, from 1 July 2008, wheat sales fall to be made by Z Ltd. At 30 June 2008, 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 sales of wheat.

Both Y Ltd and Z Ltd use fair value accounting for the futures contracts. Z Ltd has elected out of the operation of Regulations 7 and 8, but Y Ltd has not.

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 6(12) 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. The election made by Z Ltd does not apply 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 sale of wheat (or when the contract comes to an end, if this is earlier), 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 Regulation 6(3) election made by Z Ltd will apply to any new wheat future contracts entered into by Z Ltd after 30 June 2008. Fair value profits and losses on such contracts will be brought into account as they are recognised in the accounts