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HMRC internal manual

Corporate Finance Manual

Old rules: derivative contracts: transition to FA02 SCH26: change of accounting date before 1 October 2002

Change of accounting date before 1 October 2002

The rules in FA 2002 (now rewritten under CTA09/PT7) apply for all company accounting periods that begin on or after 1 October 2002. In a few cases, however, the rules will apply from the beginning of a previous accounting period.

FA02/SCH28/PARA1 applies where the company has changed its accounting date. It must, as a result of the change, have a shortened accounting period beginning on or after 1 October 2001 and ending before 30 September 2002. It will then have an extra accounting period, beginning before 1 October 2001, to which the financial instrument rules in FA 1994 could continue to apply. The legislation calls this the ‘subsequent accounting period’.

The purpose or one of the purposes, of changing the accounting date must be to gain a specific tax advantage. This will happen where, in the subsequent accounting period, either:

  • a trading or non-trading credit would be bigger, or
  • a debit would be smaller

if the accounting period was taxed under the FA 2002 rules compared to the FA 1994 rules. This includes cases where the FA 1994 rules produce a debit that would not be present at all if the FA02/SCH26 regime applied to the period, or conversely where the old rules completely avoid the taxation of a credit.

Where these conditions are met, FA02/SCH28/PARA1 applies the new rules in FA 2002 from the beginning of the accounting period that includes 1 October 2002.

Para 1 is anti-avoidance legislation to prevent deliberate manipulation in order to gain a tax advantage. It is intended to have a deterrent effect, and there are unlikely to be many cases where the legislation needs to be applied. It will not apply where the company changes its accounting date for commercial reasons, and this leads to a purely incidental tax benefit in relation to derivative contracts which it holds.

In particular, HMRC staff should note that it is very unlikely that the company was intending to gain a tax advantage where the change of accounting date was notified to Companies House before 19 December 2001, the date the consultative document was published.