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HMRC internal manual

Corporate Finance Manual

Old rules: derivative contracts: basic rules pre FA 2004: expenses

Charges and expenses

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

FA02/SCH26/PARA15(4) sets out the scope of the expenses to be brought into account for tax purposes. They must be incurred directly on the activities listed in the following table.

Legislation Expense Examples
15(4)(a) Bringing a derivative contract into existence. Arrangement fees with banks.

Fee or commission for an interest rate swap.

Premium payments.

Costs of checking the credit status of the counterparty.      
  15(4)(b) Entering into, or giving effect to, a related transaction. Broker’s fees on purchase or sale of underlying securities.
Legal fees on the transfer of a security directly resulting from transaction.      
  15(4)(c) Making a payment under a derivative contract or related transaction. Bank charges for making cash settlement payments or swap payments.
  15(4)(d) Pursuing payments due under a derivative contract or related transaction. Solicitor’s fees incurred in enforcing rights under a derivative contract.
  15(5) Attempting to bring a derivative contract into existence. This covers abortive expenditure. As long as the expense would have been allowable had the company entered into the derivative contract, it is still allowable even if the contract never exists.

In a large number of cases, someone entering into a derivative contract will need to provide security to the other party. For example, someone buying or selling exchange-traded futures or options will need to put up margin. A company entering into an over-the- counter contract may need to provide collateral, or a guarantee, or both. Incidental costs which are directly incurred in providing such security, for example, a guarantee fee, or legal costs for entering into an ISDA Credit Support Deed, are allowable under FA02/SCH26/PARA15(4)(a).

Expenditure is not allowable under the derivatives contract rules if it is not directly related to a specific derivative transaction. Examples are:

  • costs of general advice on risk management
  • costs of becoming a member of a futures or options trading exchange.