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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Old rules: derivative contracts: transitional provisions: Paras 4B and 4C

Transitional provisions where Para 4A does not apply

Para 4A does not exhaust the circumstances in which an equity derivative, previously a chargeable asset, might have moved into Sch 26 for the first time.

A company might have held the contract on 16 March 2005, but 16 March might have fallen within an ‘old’ accounting period - one beginning before 1 January 2005.

A company may have had a period of account that began before 1 January 2005, but acquired an equity derivative after 16 March.

In both of these cases, the equity derivative would - in the absence of any special provision - have become a derivative contract at the start of the company’s next period of account. Paras 4B and 4C brought the transition forward to an earlier date. They came into force on 28 July 2005 - having been introduced by SI 2005/2082, laid on 27 July 2005 - and applied to periods of account ending on or after 28 July.

Para 4B dealt with the situation in the first of the bullet points above. It applied where

  • a company held a relevant contract both immediately before and on 28 July 2005, but the contract was a chargeable asset rather than a derivative contract before that date (because 28 July 2005 fell into a period of account beginning before 1 January 2005); but
  • if a new accounting period had begun on 28 July, the contract would have been a derivative contract.

Where the conditions were met, the contract was treated as having been disposed of, and immediately reacquired, on 28 July 2005, for a consideration equal to its fair value on that date. The chargeable gain or allowable loss on disposal is brought into account when the company ceases to be party to the contract.

Para 4C applied where the company only acquired the relevant contract on or after 28 July 2005, but it was not (apart from Para 4C) a derivative contract on acquisition, because the acquisition occurred in a period beginning before 1 January 2005. In this case, Para 4C treated it as being a derivative contract from the date of acquisition. Thus there was no transition from capital gains rules to the derivative contracts regime, and therefore no need for any deemed disposal.

Examples illustrating paragraphs 4B and 4C are at CFM83220.