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HMRC internal manual

Corporate Finance Manual

Old rules: derivative contracts: transition to FA02 SCH26: overview


This guidance describes the post-FA 2002 taxation of loan relationships, derivative contracts and FOREX. 

This section of the guidance takes a look at the transitional rules that are needed when the derivative contract legislation begins to apply to the company.

The FA 2002 derivative contract rules (now rewritten under CTA09/PT7) generally apply for all accounting periods beginning on or after 1 October 2002 but there is an anti-avoidance rule to prevent companies gaining a tax advantage by changing accounting dates. See CFM85020for more details.

The rest of the section considers any adjustments that might be needed when a company has existing contracts that are brought within the FA 2002 derivative contract rules. These are summarised below.

Type of contract Transitional treatment
Interest rate, currency or debt contracts that were previously qualifying contracts within the financial instrument rules in FA 1994. FA 2002 has a provision to prevent double taxation or double relief in respect of such contracts. See CFM85030.
Contracts held on trading account, so that they were taxed under Case I. Where a company’s dealings in the derivative in question were previously within Case I (or, exceptionally, Case VI), the tax treatment will have already been following the accounts and no special transitional measures are required.
Post cessation profits or losses where the contract is no longer held by the company. See CFM85040 for transitional arrangements in these cases.
Chargeable assets (or contracts treated as assets by TCGA92/S143). See transitional rules at CFM85050.
Contracts designed to produce a guaranteed return, taxed under ICTA88/SCH5AA. See transitional rules at CFM85060+.

This section of the guidance will help you to decide if and when you need to include additional amounts for accounting periods within the new rules. The relevant legislation is in FA02/SCH28.