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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: basic rules pre FA 2004: electing for MTM

Electing to use mark to market

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

A company that is not incorporated in the UK and draws up its accounts according to ‘home state’ rules may be precluded by those rules from marking to market its derivative contracts. In such cases FA02/SCH26/PARA19 (2) allows it to elect to mark those derivative contracts to market for the purposes of corporation tax, provided that it would use that method if it were subject to UK GAAP.

This provision is likely to be relevant primarily to UK branches of overseas banks where MTM accounting is not followed in the home state.

FA02/SCH26/PARA19(3) requires the election to be made within 2 years of

  • the company’s first accounting period to begin on or after 1 October 2002, or
  • the first accounting period thereafter in which it is a party to derivative contracts eligible for the election.

The election applies for that and later accounting periods, covers all the company’s derivative contracts to which GAAP would apply mark to market and is irrevocable.

If a company makes the election in relation to its derivative contracts it is also treated as making the equivalent election under FA96/S86(3A) in relation to its loan relationships - FA02/SCH26/PARA19(4).