Finance Act 2002

Qualified exclusion: contract producing guaranteed return

6 (1) Paragraph 4 does not prevent a relevant contract to which this paragraph applies from being a derivative contract.

(2) This paragraph applies to a relevant contract of a company if—

(a) its underlying subject matter consists, or is treated as consisting, wholly of—

(i) shares in a company,

(ii) rights of a unit holder under a unit trust scheme, or

(iii) assets representing a loan relationship to which either section 92 or 93 of the Finance Act 1996 (c. 8) applies, and

(b) it satisfies the condition in sub-paragraph (3).

(3) The condition referred to in sub-paragraph 2(b) is that—

(a) the relevant contract is designed to produce a guaranteed return, or

(b) the relevant contract and one or more of the following, namely—

(i) one or more other relevant contracts, whose underlying subject matter consists wholly or partly of shares in a company, rights of a unit holder under a unit trust scheme or assets representing loan relationships to which either section 92 or 93 of the Finance Act 1996 applies, and which would be derivative contracts if the condition in this sub-paragraph were satisfied in relation to them,

(ii) one or more assets representing loan relationships to which either section 92 or 93 of that Act applies, and

(iii) one or more assets representing loan relationships to which section 93A of that Act applies,

are associated transactions designed to produce a guaranteed return.

(4) For the purposes of this paragraph—

(a) the return on a relevant contract of a company comprises any amounts accruing to the company as respects the contract for any accounting period, and

(b) the return on an asset representing a loan relationship of a company is the amount that must be paid to discharge the money debt arising in connection with that relationship.

(5) For the purposes of this paragraph the relevant contract in question is, or that contract and the other associated transactions are, designed to produce a guaranteed return if, as regards that contract, or as regards that contract and the other associated transactions taken together, it would be reasonable to assume, from considering—

(a) the likely effect of that contract or of that contract and the other associated transactions,

(b) the circumstances in which—

(i) that contract is entered into or acquired, or

(ii) the contract and the other associated transactions, or any of them, are entered into or acquired, or

(c) the matters in both of paragraphs (a) and (b),

that the main purpose (or one of the main purposes) of that contract, or of that contract and the other associated transactions, is or was the production of a guaranteed return from that contract, or from that contract and any one or more of the other associated transactions.

(6) For the purposes of this paragraph a guaranteed return is produced from the relevant contract in question, or from that contract and any one or more of the other associated transactions, wherever (as regards that contract or as regards that contract and those transactions, taken together) risks from fluctuations in the underlying matter of that contract, or of that contract or any one or more of the other associated transactions, are so eliminated or reduced as to produce a return from that contract, or from that contract and any one or more of the other associated transactions, which equates, in substance, to the return on an investment of money at interest.

(7) For the purposes of sub-paragraph (6) the cases where risks from fluctuations in the underlying matter of the relevant contract in question, or of that contract or any one or more of the other associated transactions, are eliminated or reduced shall be deemed to include any case where the main reason, or one of the main reasons, for the choice of that underlying matter is—

(a) that there appears to be no risk that it will fluctuate, or

(b) that the risk that it will fluctuate appears to be insignificant.

(8) In this paragraph—

(a) the references, in relation to an asset representing a loan relationship to which section 92 of the Finance Act 1996 (c. 8) applies, to the underlying matter are references to the value of shares in a company which may be acquired under that relationship;

(b) the references, in relation to an asset representing a loan relationship to which section 93 or 93A of the Finance Act 1996 applies, to the underlying matter are references to the value of chargeable assets of a particular description to which that relationship is linked;

(c) the references, in relation to a relevant contract, to fluctuations in the underlying matter are references to fluctuations determined by reference to its underlying subject matter.

(9) For the purposes of this paragraph a company is a connected company in relation to another company if, in the accounting period in question, there is a connection between the company and that other company; and whether there is a connection between those companies shall be determined in accordance with sections 87(3) and (4) and 87A of the Finance Act 1996 (disregarding section 88 of that Act).

(10) Paragraph 9 applies for the purpose of determining whether the underlying subject matter of a relevant contract is to be treated as consisting wholly of the property referred to in sub-paragraph (2)(a).