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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Old rules: derivative contracts: qualified exclusions: shares held for trade purposes

Shares held for trade purposes

This guidance applies to periods of account beginning before 1 January 2005, or beginning after that date and ending before 16 March 2005

The effect of FA02/Sch 26 paras 4(2)(d) and 4(3), before the amendments in SI 2005/646, was to exclude from the derivative contract regime any futures, options, swaps or other derivatives which had shares, or share indices, as their underlying subject matter (USM). But banks, share dealers and similar financial institutions may have held such derivatives on their trading books. In the absence of Sch 26, profits from trading in such derivatives would have fallen within Case I Sch D on normal principles. This treatment continued under the Sch 26 rules.

FA02/SCH26/PARA5 therefore qualified the USM exclusions in Para 4. If a company:

  • entered into or acquired a relevant contract for the purposes of a trade which it carried on, and
  • the USM of the contract was wholly shares, holdings in a unit trust, or (for accounting periods beginning before 1 January 2005) securities within either FA96/S92 or FA96/S93,

the contract was a derivative contract.

When looking at the USM of the contract, you should first eliminate any minor subject that is subordinate to the shares (or unit trust holdings or S92 or S93 securities), or is of small value compared to the totality of the subject matter. (CFM50580 tells you about this.)

It is a question of fact whether a company holds equity derivatives for the purposes of a trade. Such derivatives will be held for the purposes of a trade if they are hedging trading transactions, or if they are held on the trading book of a bank or other financial trader. Alternatively, it is possible that dealing in derivatives will amount to a trade in its own right. In disputed cases, intention and the frequency of transactions will be important.

Statement of Practice 14/91, although dealing with financial futures and options in the context of TCGA92/S143, gives guidelines as to when derivatives can be regarded as held for the purposes of a trade. You should apply the general guidance at BIM20051 onwards should you need to determine whether a trade of buying and selling derivatives exists.

The qualification in Para 5 did not apply to contracts whose USM was land, chattels (which are not commodities) or intangible fixed assets.