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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Old rules: derivative contracts: basic rules pre FA 2004: related transactions

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

A related transaction includes any of the following:

  • any disposal or acquisition (in whole or part) of rights and liabilities under the derivative contract
  • performance of the contract in accordance with its terms, either by delivering the underlying subject matter or by cash settlement
  • any sale, gift, surrender or release of rights and liabilities under the derivative contract.

It is not a related transaction where a contract, for example an exchange-traded future, is closed out by entering into a reciprocal contract with equal and opposite rights and liabilities. The company does not dispose of the first contract. It continues to hold the two contracts until both mature, at which point the company’s obligations under each of the two contracts are netted off and cancel out. But, from the point at which the company closes out its position, it will not bring any further debits or credits into its accounts in respect of either contract. So the fact the company has not disposed of the original contract will, in practice, make no difference to the tax treatment.