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HMRC internal manual

Corporate Finance Manual

Old rules: derivative contracts: overview: FA 1994

The 1994 financial instruments rules

This guidance applies to periods of account beginning before 1 January 2005

By the beginning of the 1990s, it was becoming increasingly common for UK companies to be parties to newer types of financial instrument such as swaps and the tax treatment of such instruments was not always certain.

The Financial Instruments legislation in FA 1994, together with the forex legislation in FA 1993 as it applied to currency contracts, was intended to provide certainty of tax treatment for companies which entered into interest rate contracts or currency contracts.

The rules applied to company accounting periods beginning on or after 23 March 1995. A third category of financial instrument, debt contracts, was brought into the legislation by FA 1996, with effect from 1 April 1996.

The legislation was repealed for accounting periods beginning on or after 1 October 2002. HMRC staff requiring guidance on the earlier legislation should consult CTIAA (Financial Products Team).

The FA 1994 rules worked in a prescriptive manner. They contained tight definitions of what constituted interest rate, currency and debt contracts. The objective of the legislation was for the tax treatment of these instruments to follow the accounts. It worked by defining amounts which were qualifying payments under the rules and then slotting these qualifying payments into a formula to arrive at the profit or loss under the contract.

The regime worked well for many of the most common sorts of contract which companies entered into, but

  • it often did not cater for emerging types of derivatives, such as credit derivatives, and where contracts fell outside of the FA 1994 rules their tax treatment was often uncertain,
  • it introduced complexity because companies had to consider whether particular payments fell within the defined categories of qualifying payment, and
  • some tax-avoidance schemes attempted to exploit the rules to produce a mismatch between the tax and accounts results.

Guidance on the FA 1994 rules may be found in the Company Taxation Manual, see CTM70000 onwards.