HMRC internal manual

Corporate Finance Manual

CFM85030 - Old rules: derivative contracts: transition to FA02 SCH26: contracts previously taxed by FA 1994

Contracts previously taxed by FA 1994

The FA 1994 financial instruments regime applied to three defined types of contract:

  • Interest-rate contracts
  • Currency contracts
  • Debt contracts.

The legislation referred to these as ‘qualifying contracts’. Contracts that were previously qualifying contracts will be within the scope of the FA 2002 regime. Profits and losses will continue to be taxed or relieved as trading receipts or expenses, or will continue to give rise to non-trading credits or debits, as appropriate.

FA02/SCH28/PARA3 {#}sets out a general rule that on moving from the FA 1994 regime to the FA 2002 regime

  • no amounts are brought into account twice, and
  • no amounts are left out of account.

Any adjustment needed should be made in the first accounting period to which the FA 2002 rules apply.

The old rules in FA 1994 calculated the amounts to be taxed or relieved in a way that was designed to reproduce the same result as an authorised accounting method. In practice it should be rare for a company to need to make any adjustment under FA02/SCH28/PARA3, as the derivative contract rules in most cases accept accounts figures where the accounts follow GAAP. The situation where adjustments are most likely to be needed is where a currency contract hedges an asset, and exchange gains and losses on the contract have been accounted for using the offset or cover method (see CFM62010). There may be a disparity between the treatment of such exchange differences between the elective matching rules of FA 1993, and that mandated by FA02/SCH26/PARA16(3)(a) (now CTA09/S606) - see CFM62220.

FA02/SCH28/PARA3 requires a comparison to be made between the total amount that has been brought into account under the FA 1994 rules, and the amount that would have been brought into account had FA02/SCH26 applied over the same period.

The comparison ignores any adjustments made under the FA 1993 and FA 1994 anti-avoidance provisions, or any adjustments that could be made under the special computational rules in FA02/SCH26/PARA23 to PARA31 (including the unallowable purposes rule).

In this way, a company cannot use Para 3 to get relief under the derivative contract rules for losses that were disallowed under the old anti-avoidance provisions. HMRC cannot use Para 3 either to apply particular provisions of FA02/SCH26 retrospectively.