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HMRC internal manual

Corporate Finance Manual

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Old rules: derivative contracts: overview: amending regulations

Amending regulations

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

The principal regulations relevant to derivative contracts were:

SI 2004/2201: The Finance Act 2002, Schedule 26, Parts 2 and 9 (Amendment) Order 2004 This Order broadened the scope of Schedule 26 to include property derivatives; and inserted a new para 45A that provided for credits or debits on property derivatives to be brought into account as chargeable gains or allowable losses - see CFM55000 for the current rules.
   
SI 2004/3268: The Finance Act 2002, Schedule 26, Parts 2 and 9 (Amendment No 2) Order 2004 This made further provision for derivatives contracts embedded into a debtor loan relationship - in other words, applying to the issuer of an exchangeable security. The Order also covered derivatives embedded in contracts that are not loan relationships - see CFM52520 for the current rules.
SI 2005/646 The Finance Act 2002, Schedule 26, Parts 2 and 9 (Amendment) Order 2005 These Regulations affected contracts held on 16 March 2005, in periods of account beginning on or after 1 January 2005 and ending on or after 16 March 2005. They provide for most derivatives over shares to come within the Schedule 26 regime, with a transitional rule for derivatives that had previously been chargeable gains assets. There were consequential amendments to other parts of the Schedule.
SI 2005/2082 The Finance Act 2002, Schedule 26, Parts 2 and 9 (Amendment No 2) Order 2005 These Regulations enacted further rules relating to the treatment of derivatives embedded in convertible or exchangeable securities, from the issuers’ perspective, and modified the rules applicable to holders of such securities. They also made further refinements to paras 3 and 4 of Schedule 26.
SI 2005/3440 Finance Act 2002, Schedule 26, Parts 2 and 9 (Amendment No 3) Order 2005 This principally amended the election out of FA02/SCH26/PARA45L (introduced by SI 2005/2082), and corrected various minor defects in other provisions. See CFM52530 for the current guidance.
SI 2004/3271: The Loan Relationships and Derivative Contracts (Change of Accounting Practice) Regulations 2004 These Regulations dealt with the deferral until 2006 of debits or credits arising in a company’s first accounting period beginning in 2005, as a result of the transition to IAS. Further regulations (The Loan Relationships and Derivative Contracts (Change of Accounting Practice)(Amendment) Regulations 2005 - SI 2005/3383) spread most such transitional adjustments over 10 years.
SI 2004/3256: The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) Regulations 2004 Allow certain gains or losses on hedging contracts that would otherwise be brought into account to be initially disregarded and then brought into account at a later time. They are:
  • exchange gains or losses, which are taken to equity, on a currency contract used to hedge a forecast transaction - CFM57080.
  • profits or losses on commodity contracts used to hedge a forecast transaction - CFM57140.
It also provides for an ‘appropriate accruals basis’ to be used for tax purposes for an interest rate contract that functions as a hedge.    
    These Regulations also contain provisions affecting forex matching - see the Taxing Forex guidance.
The ‘Disregard Regulations’ were amended twice in 2005, by SI 2005/2012 and SI 2005/3374. Further regulations (SI 2006/843, with an error corrected by SI 2006/936) contained anti-avoidance provisions relating to two forex matching schemes, and came into force on 22 March 2006.