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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
, see all updates

Old rules: derivative contracts: basic rules pre FA 2004: mandatory mark to market

Mandatory mark to market

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

There are two situations where the legislation makes mark to market mandatory for tax purposes.

1) Companies producing accounts according to legislation of home state

Where a company

  • produces accounts according to the legislation of its home state, and
  • if it were a UK company following UK GAAP it would have used mark to market for (some or all of) its derivative contracts and loan relationships, and
  • mark to market has been used in the statutory accounts for (some or all of) the company’s loan relationships but not its derivative contracts

then the company must use mark to market for all its derivative contracts to which that accounting method would be applied by GAAP (FA02/SCH26/PARA20). A company will only be subject to this rule if it has not elected to use mark to market under FA02/SCH26/PARA19(2) in respect of its derivative contracts.

This no longer applies in periods of account beginning on or after 1 January 2005.

2) Contracts falling within Para 6, 7, 8 or 36

FA02/SCH26/PARA21requires mark to market to be used where the derivative contract is one to which any of the following provisions apply:

  • FA02/SCH26/PARA6 (guaranteed return - CFM83100)
  • FA02/SCH26/PARA7 (guaranteed minimum amount on maturity - CFM83160)
  • FA02/SCH26/PARA8 (contracts to provide insurance benefits - CFM83180)

Paragraphs 6, 7 and 8 are repealed with effect for periods of account beginning on or after 1 January 2005 and ending on or after 16 March 2005. If, exceptionally, one of these paragraphs applies to a contract held in a period beginning on or after 1 January 2005 but ending before 16 March, Para 21 continues to apply, with the substitution of ‘fair value accounting’ for ‘mark to market’.

FA02/SCH26/PARA36 (derivative contracts over holding in certain unit trust schemes and OEICs) also mandates the use of a mark to market basis. This continues to apply in periods beginning on or after 1 January 2005, but the company is required to use a fair value basis of accounting for the contract, rather than mark to market.