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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Old rules: derivative contracts: transitional to FA02 SCH26: contracts with guaranteed returns

Contracts with guaranteed returns: Sch 5AA ICTA 1988

Futures and options can be used to generate a guaranteed return economically equivalent to interest. Before March 1997 such returns were usually received as capital gains, gaining the advantage of

  • indexation allowance, or
  • capital losses to frank the gain.

ICTA88/SCH5AA introduced a Case VI charge on such profits realised on or after 5 March 1997 from the futures or options concerned.

Sch 5AA no longer applies for company accounting periods beginning on or after 1 October 2002. Futures, options or contracts for differences (CFDs) forming part of guaranteed return arrangements are derivative contracts from a company’s commencement day. Since Sch 5AA brought profits into account on a realisation basis, generally when the contract in question was disposed of, the absence of any special provision would mean amounts could drop out of account when taxation of the contract moves to an accruals basis under Sch 26.

For periods beginning on or after 1 October 2002, FA02/SCH28/PARA6 ensures that any amount which would have become chargeable under the old rules of Sch 5AA is treated as a non-trading credit, to the extent that it exceeds the amounts that are already taken into account under the derivative contract rules.

The credit is brought into account for the period in which the disposal of the contract, or other event that would have triggered a Case VI charge under Sch 5AA, occurs.