Creditor relationships: embedded derivatives which are exactly tracking contracts for differencesU.K.
[F145F.(1)This paragraph applies to a derivative contract of a company for an accounting period if the following conditions are satisfied—
[F2(a)the derivative contract is a loan-contract embedded derivative to which the company is treated as party by virtue of a creditor relationship of the company (“the original relationship”),
(c)the derivative contract is treated as a contract for differences by virtue of section 94A(3) of the Finance Act 1996,]
(d)the additional conditions in sub-paragraph (2) are satisfied.
(2)The additional conditions are—
(a)the [F3original relationship] is not one to which the company is party at any time in the accounting period for the purposes of a trade carried on by the company (but see sub-paragraph (3)),
F4(b). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(c)the underlying subject matter of the derivative contract—
F5(i). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(ii)is qualifying ordinary shares listed on a recognised stock exchange,
(d)the company is not a body falling within paragraph 45C(3) (authorised unit trusts etc),
(e)the derivative contract is an exactly tracking contract (see sub-paragraphs (4) to (6)).
[F6(f)the original asset is not an existing asset.]
(3)The condition in sub-paragraph (2)(a) does not apply if the company—
(a)is party to the [F7original relationship] for the purposes of life assurance business, or
(b)is a mutual trading company.
(4)For the purposes of this paragraph “an exactly tracking contract” is a contract for differences where D is equal to the amount determined by applying R% to C, where—
D is the amount that must be paid to discharge the rights and liabilities that fall to be treated as comprised in the contract;
R% is a relevant percentage change in the value of the underlying subject matter of the contract (see sub-paragraph (5));
C is the amount falling for the purposes of Chapter 2 of Part 4 of the Finance Act 1996 to be regarded in accordance with generally accepted accounting practice as the initial cost of [F8the original asset].
(5)In sub-paragraph (4), the reference to a relevant percentage change in the value of the underlying subject matter of the contract is a reference to the percentage change (if any) over the relevant period in—
(a)the value of the assets which are the underlying subject matter of the contract,
(b)or any index of the value of those assets.
(6)In sub-paragraph (5) “the relevant period” means—
(a)the period between—
(i)the date when [F9the original asset] came into existence, and
(ii)the date when the [F10debtor relationship corresponding to the creditor relationship mentioned in sub-paragraph (1)] comes to an end; or
(b)any other period in which almost all of that period is comprised, and which differs from that period exclusively for purposes connected with giving effect to a valuation in relation to rights or liabilities under [F11the original asset].
(7)In this paragraph[F12—
“existing asset” means an asset in relation to which paragraph 11(2) of Schedule 10 to the Finance Act 2004 has effect;]
“qualifying ordinary shares” means shares which satisfy Condition 1 in paragraph 45D(5).
[F13(8)The [F14original relationship] shall not be treated as a qualifying corporate bond by virtue of section 117(A1) of [F15TCGA 1992].]]
Textual Amendments
F1Sch. 26 paras. 45A-45I inserted (with effect in accordance with art. 1(2)(3)(4) of the amending S.I.) by The Finance Act 2002, Schedule 26, Parts 2 and 9 (Amendment) Order 2004 (S.I. 2004/2201), arts. 1(1), 15
F2Sch. 26 para. 45F(1)(a)(c) substituted for Sch. 26 para. 45F(1)(a)-(c) (with effect in accordance with art. 1(2) of the amending S.I.) by virtue of The Finance Act 2002, Schedule 26, (Parts 2 and 9) (Amendment) Order 2006 (S.I. 2006/3269), arts. 1, 15(2)
F3Words in Sch. 26 para. 45F(2)(a) substituted (with effect in accordance with art. 1(2) of the amending S.I.) by The Finance Act 2002, Schedule 26, (Parts 2 and 9) (Amendment) Order 2006 (S.I. 2006/3269), arts. 1, 15(3)
F4Sch. 26 para. 45F(2)(b) omitted (with effect in accordance with art. 1(2) of the amending S.I.) by virtue of The Finance Act 2002, Schedule 26, Parts 2 and 9 (Amendment) Order 2005 (S.I. 2005/646), arts. 1(1), 15
F5Sch. 26 para. 45F(2)(c)(i) omitted (with effect in accordance with art. 1(2) of the amending S.I.) by virtue of The Finance Act 2002, Schedule 26, (Parts 2 and 9) (Amendment) Order 2006 (S.I. 2006/3269), arts. 1, 15(4)
F6Sch. 26 para. 45F(2)(f) substituted (with effect in accordance with art. 1(2) of the amending S.I.) by The Finance Act 2002, Schedule 26, (Parts 2 and 9) (Amendment) Order 2006 (S.I. 2006/3269), arts. 1, 15(5)
F7Words in Sch. 26 para. 45F(3)(a) substituted (with effect in accordance with art. 1(2) of the amending S.I.) by The Finance Act 2002, Schedule 26, (Parts 2 and 9) (Amendment) Order 2006 (S.I. 2006/3269), arts. 1, 15(6)
F8Words in Sch. 26 para. 45F(4) substituted (with effect in accordance with art. 1(2) of the amending S.I.) by The Finance Act 2002, Schedule 26, (Parts 2 and 9) (Amendment) Order 2006 (S.I. 2006/3269), arts. 1, 15(7)
F9Words in Sch. 26 para. 45F(6)(a)(i) substituted (with effect in accordance with art. 1(2) of the amending S.I.) by The Finance Act 2002, Schedule 26, (Parts 2 and 9) (Amendment) Order 2006 (S.I. 2006/3269), arts. 1, 15(8)(a)
F10Words in Sch. 26 para. 45F(6)(a)(ii) substituted (with effect in accordance with art. 1(2) of the amending S.I.) by The Finance Act 2002, Schedule 26, (Parts 2 and 9) (Amendment) Order 2006 (S.I. 2006/3269), arts. 1, 15(8)(b)
F11Words in Sch. 26 para. 45F(6)(b) substituted (with effect in accordance with art. 1(2) of the amending S.I.) by The Finance Act 2002, Schedule 26, (Parts 2 and 9) (Amendment) Order 2006 (S.I. 2006/3269), arts. 1, 15(8)(c)
F12Words in Sch. 26 para. 45F(7) inserted (with effect in accordance with art. 1(4) of the amending S.I.) by The Finance Act 2002, Schedule 26, Parts 2 and 9 (Amendment No. 2) Order 2005 (S.I. 2005/2082), arts. 1(2), 15(3)
F13Sch. 26 para. 45F(8) substituted (with effect in accordance with art. 1(4) of the amending S.I.) by The Finance Act 2002, Schedule 26, Parts 2 and 9 (Amendment No. 2) Order 2005 (S.I. 2005/2082), arts. 1(2), 15(4)
F14Words in Sch. 26 para. 45F(8) substituted (with effect in accordance with art. 1(2) of the amending S.I.) by The Finance Act 2002, Schedule 26, (Parts 2 and 9) (Amendment) Order 2006 (S.I. 2006/3269), arts. 1, 15(9)
F15Words in Sch. 26 para. 45F(8) substituted (with effect in accordance with art. 1(2) of the amending S.I.) by The Finance Act 2002, Schedule 26, (Parts 2 and 9) (Amendment) Order 2006 (S.I. 2006/3269), arts. 1, 30