Finance Act 2002

Part 2 U.K. Derivative contracts

Derivative contracts and relevant contracts U.K.

2 [F1 (1) For the purposes of the Corporation Tax Acts, a company’s derivative contracts are those of its relevant contracts—

(a) which satisfy any of the conditions in paragraphs (a) to (c) of paragraph 3(1), and

(b) which are not prevented from being derivative contracts by paragraph 4 or any other provision of the Corporation Tax Acts.]

(2) For the purposes of this Schedule a “relevant contract” is—

(a) an option,

(b) a future, or

(c) a contract for differences.

[F2 (2A) For provisions which treat a company as being party to a relevant contract see—

(a) section 94A of the Finance Act 1996 (loan contracts with embedded derivatives);

(b) paragraph 2A below (non-financial contracts with embedded derivatives);

(c) paragraph 2B below (hybrid derivatives).

(2B) In this Schedule “plain vanilla contract” means a relevant contract other than one to which a company is treated as being party by virtue of a provision mentioned in sub-paragraph (2A).]

Textual Amendments

F1 Sch. 26 para. 2(1) 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 2004 (S.I. 2004/2201), arts. 1(1), 3

F2 Sch. 26 para. 2(2A)(2B) substituted for Sch. 26(3)-(5) (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, 3

Non-financial contracts with embedded derivatives U.K.

[F3 2A. (1) This paragraph applies where—

(a) a company is party to a contract (a “non-financial contract”) which is not a loan relationship and to which paragraph 2B does not apply, and

(b) in accordance with generally accepted accounting practice, the company treats rights and liabilities under the contract as divided between—

(i) rights and liabilities under one or more derivatives (“embedded derivatives”), and

(ii) the remaining rights and liabilities (the “non-financial host contract”).

(2) The company is to be treated for the purposes of this Schedule as—

(a) party to a relevant contract (a “non-financial embedded derivative”) whose rights and liabilities consist only of the embedded derivative, or

(b) if there is more than one embedded derivative, party to relevant contracts each of whose rights and liabilities consist only of one of the non-financial embedded derivatives.

(3) Each relevant contract to which the company is treated as party under sub-paragraph (2) is to be treated as an option, a future, or a contract for differences according to whether the rights and liabilities of the embedded derivative would be of that character if contained in a separate contract.

Textual Amendments

F3 Sch. 26 paras. 2A, 2B inserted (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, 4

Hybrid derivatives U.K.

2B. (1) This paragraph applies where—

(a) a company is party to a relevant contract which satisfies the conditions in paragraph (b) or (c) of paragraph 3(1) (a “hybrid derivative”),

(b) in accordance with generally accepted accounting practice, the company treats rights and liabilities under the contract as divided between—

(i) rights and liabilities under one or more derivatives (“embedded derivatives”), and

(ii) the remaining rights and liabilities (the “host contract”), and

(c) a contract consisting of only those remaining rights and liabilities would be a relevant contract.

(2) The company is to be treated for the purposes of this Schedule as—

(a) party to a relevant contract whose rights and liabilities consist only of the embedded derivative, or (if there is more than one derivative), party to relevant contracts each of whose rights and liabilities consist only of one of the embedded derivatives, and

(b) party to a relevant contract whose rights and liabilities are those of the host contract.

(3) Each relevant contract to which the company is treated as party under sub-paragraph (2)(a) (a “nested derivative”) or (2)(b) (a “quasi-derivative host contract”) is to be treated as an option, a future, or a contract for differences according to whether the rights and liabilities of the embedded derivative or host contract would be of that character if contained in a separate contract.]

Textual Amendments

F3 Sch. 26 paras. 2A, 2B inserted (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, 4

Contracts to satisfy accounting requirements etc U.K.

3 (1) A relevant contract is not a derivative contract for the purposes of this Schedule for any accounting period unless—

(a) it is treated for accounting purposes as a derivative F4 ..., F5 ...

[F6 (b) it is a relevant contract which—

(i) does not fall within paragraph (a) solely because it does not meet the requirement in paragraph 9(b) of Financial Reporting Standard 26 issued in December 2004 by the Accounting Standards Board, but

(ii) [F7 for accounting purposes is, or forms] part of, a financial asset or liability, or]

F8 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(c) in the case of a relevant contract which [F9 does not fall within] paragraph (a) [F10 or (b)] F11 ..., it falls within sub-paragraph (2).

(2) A relevant contract falls within this sub-paragraph if—

(a) its underlying subject matter is commodities, or

[F12 (b) it is a contract for differences whose underlying subject matter is—

(i) land (wherever situated),

(ii) tangible movable property, other than commodities which are tangible assets,

(iii) intangible fixed assets,

(iv) weather conditions, [F13 or]

(v) creditworthiness.]

(3) For the purposes of sub-paragraph (1)(a), a relevant contract of a company is treated for accounting purposes as a derivative F14 ... for an accounting period if, for that accounting period, it is so treated for the purposes of the relevant accounting standard used by the company for that accounting period (or would be so treated if the company were a company [F15 which used a relevant] accounting standard in respect of the relevant contract).

[F16 (4) For the purposes of sub-paragraph (1)(b), a relevant contract of a company is treated for accounting purposes as, or as forming part of, a financial asset or liability for an accounting period if, for that accounting period, it is so treated for the purposes of the relevant accounting standard used by the company for that accounting period (or would be so treated if the company were a company which used a relevant accounting standard for that accounting period in respect of the relevant contract).]

F17 (4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(5) [F18 In this paragraph “relevant accounting standard” means—]

F19 (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

[F20 (aa) in relation to any accounting period for which it is required or permitted to be used F21 ..., Financial Reporting Standard 25 issued in December 2004 by the Accounting Standards Board, or]

(b) in relation to any accounting period for which it is required or permitted to be used F22 ..., any subsequent accounting standard dealing with transactions which are [F23 derivatives] F24 ... under Financial Reporting Standard [F25 25], as from time to time amended.

Textual Amendments

F4 Words in Sch. 26 para. 3(1)(a) 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, 5(2)

F5 Word in Sch. 26 para. 3(1)(a) omitted (with effect in accordance with art. 1(3) of the amending S.I.) by virtue of The Finance Act 2002, Schedule 26, Parts 2 and 9 (Amendment No. 2) Order 2005 (S.I. 2005/2082), arts. 1(2), 4(2)

F6 Sch. 26 para. 3(1)(b) inserted (with effect in accordance with art. 1(3) 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), 4(3)

F7 Words in Sch. 26 para. 3(1)(b)(ii) substituted (with effect in accordance with Sch. 22 para. 20(4)(5) of the amending Act) by Finance Act 2008 (c. 9), Sch. 22 para. 20(2)

F8 Sch. 26 para. 3(1)(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), 3(2)(b)

F9 Words in Sch. 26 para. 3(1)(c) 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 2004 (S.I. 2004/2201), arts. 1(1), 4(b)

F10 Words in Sch. 26 para. 3(1)(c) inserted (with effect in accordance with art. 1(3) 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), 4(4)

F11 Words in Sch. 26 para. 3(1)(c) 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), 3(2)(c)

F12 Sch. 26 para. 3(2)(b) substituted (with effect in accordance with art. 1(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), 4(c)

F13 Word in Sch. 26 para. 3(2)(b)(iv) 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, 5(3)

F14 Words in Sch. 26 para. 3(3) 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, 5(4)

F15 Words in Sch. 26 para. 3(3) substituted (with effect in accordance with art. 1(3) 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), 4(5)

F16 Sch. 26 para. 3(4) inserted (with effect in accordance with art. 1(3) 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), 4(6)

F17 Sch. 26 para. 3(4) 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 2004 (S.I. 2004/2201), arts. 1(1), 4(d)

F18 Words in Sch. 26 para. 3(5) substituted (with effect in accordance with art. 1(3) 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), 4(7)

F19 Sch. 26 para. 3(5)(a) 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, 5(5)(a)

F20 Sch. 26 para. 3(5)(aa) inserted (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 2005 (S.I. 2005/646), arts. 1(1), 3(3)(b)

F21 Words in Sch. 26 para. 3(5)(aa) 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, 5(5)(b)

F22 Words in Sch. 26 para. 3(5)(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 2006 (S.I. 2006/3269), arts. 1, 5(5)(c)(i)

F23 Word in Sch. 26 para. 3(5)(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, 5(5)(c)(ii)

F24 Words in Sch. 26 para. 3(5)(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 2004 (S.I. 2004/2201), arts. 1(1), 4(e)(ii)

F25 Word in Sch. 26 para. 3(5)(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 2005 (S.I. 2005/646), arts. 1(1), 3(3)(c)

Contracts excluded by virtue of their underlying subject matter U.K.

4 (1) A relevant contract is not a derivative contract for the purposes of this Schedule if its underlying subject matter consists wholly of any one or more of the excluded types of property or is treated as consisting wholly of such property.

F26 (1A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

[F27 (2) For the purposes of this paragraph the excluded types of property are—

(a) in relation to an option or future, intangible fixed assets; and

(b) in relation to relevant contracts which satisfy the conditions specified in sub-paragraph [F28 (2A), (2B), (2C) [F29 , (2CA)] or (2D)] [F30 and which are not designed to produce a return which equates, in substance, to the return on an investment of money at a commercial rate of interest]—

(i) shares in a company, [F31 other than shares excluded by sub-paragraph (2ZA); or]

(ii) rights of a unit holder under a unit trust scheme [F32 other than a scheme to which paragraph 4 of Schedule 10 to the Finance Act 1996 applies].

[F33 (2ZA) The shares excluded by this sub-paragraph are—

(a) shares in relation to which section 91A or 91B of the Finance Act 1996 has effect;

(b) shares in an open-ended investment company to which paragraph 4 of Schedule 10 to the Finance Act 1996 applies.]

[F34 (2A) The conditions specified in this sub-paragraph are that the relevant contract—

(a) is a plain vanilla contract entered into by a company carrying on life assurance business;

(b) is an approved derivative for the purposes of [F35 Rule 3.2.5 of the Insurance Prudential Sourcebook]; and

(c) does not fall within paragraph 3(1)(b).]

(2B) The conditions specified in this sub-paragraph are—

(a) the relevant contract is entered into or acquired by a company otherwise than for the purposes of a trade carried on by it or the company is a mutual trading company, F36 ...

(b) there is a hedging relationship between the contract and [F37 —

(i)] an asset of the company which consists of shares or rights of a unit holder under a unit trust scheme, [F38 or

(ii) any share capital of the company [F39 or any liability related to share capital of the company],] and

(c) the relevant contract is not [F40 a loan-contract embedded derivative.]]

[F41 (2C) The conditions specified in this sub-paragraph are—

(a) the relevant contract is entered into or acquired—

(i) by a company otherwise than for the purposes of a trade carried on by it or by a company which is a mutual trading company; or

(ii) by a company for the purposes of its life assurance business; and

(b) the relevant contract is an option, [F42 listed] on a recognised stock exchange, to subscribe for shares in a company.

[F43 (2CA) The conditions specified in this sub-paragraph are—

(a) the relevant contract is entered into or acquired—

(i) by a company otherwise than in the course of activities forming an integral part of a trade carried on by it, or

(ii) by a company which is a mutual trading company;

(b) the relevant contract is—

(i) an option to acquire shares in a company, or

(ii) a future requiring delivery of shares in a company;

(c) the relevant contract is not a loan-contract embedded derivative; and

(d) the shares to be acquired or delivered constitute, or would (if acquired or delivered) constitute a substantial shareholding within the meaning of paragraph 8 of Schedule 7AC to TCGA 1992.]

(2D) The conditions specified in this sub-paragraph are—

(a) the company that holds the relevant contract has a hedging relationship between—

(i) the relevant contract, and

(ii) an asset [F44 or liability] representing a loan relationship which is treated as mentioned in section 94A(1) of the Finance Act 1996, and

(b) each relevant contract to which the company is treated as party under section 94A(2)(b) in the case of that loan relationship is a derivative contract to which paragraph 45D, 45F, 45FA, 45J or 45K applies.]

F45 (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(4) 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 any one or more of the excluded types of property.

F46 (5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Textual Amendments

F26 Sch. 26 para. 4(1A) 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), 4(2)

F27 Sch. 26 para. 4(2)(2A)(2B) substituted for Sch. 26 para. 4(2) (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 2005 (S.I. 2005/646), arts. 1(1), 4(3)

F28 Words in Sch. 26 para. 4(2)(b) 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), 5(2)(a)

F29 Word in Sch. 26 para. 4(2)(b) inserted (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, 6(2)

F30 Words in Sch. 26 para. 4(2)(b) inserted (with effect in accordance with Sch. 22 para. 20(4)(5) of the amending Act) by Finance Act 2008 (c. 9), Sch. 22 para. 20(3)

F31 Words in Sch. 26 para. 4(2)(b)(i) substituted (with effect in accordance with art. 1 of the amending S.I.) by The Finance Act 2002, Schedule 26 (Parts 2 and 9) (Amendment No. 3) Order 2005 (S.I. 2005/3440), arts. 1, 5(2)

F32 Words in Sch. 26 para. 4(2)(b)(ii) added (with effect in accordance with art. 1 of the amending S.I.) by The Finance Act 2002, Schedule 26 (Parts 2 and 9) (Amendment No. 3) Order 2005 (S.I. 2005/3440), arts. 1, 5(3)

F33 Sch. 26 para. 4(2ZA) inserted (with effect in accordance with art. 1 of the amending S.I.) by The Finance Act 2002, Schedule 26 (Parts 2 and 9) (Amendment No. 3) Order 2005 (S.I. 2005/3440), arts. 1, 5(4)

F34 Sch. 26 para. 4(2A) 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, 6(3)

F35 Words in Sch. 26 para. 4(2A)(b) substituted (with effect in accordance with art. 1(2) of the amending S.I.) by The Insurance Companies (Corporation Tax Acts) (Miscellaneous Amendments) Order 2006 (S.I. 2006/3270), arts. 1(1), 11(a)

F36 Word in Sch. 26 para. 4(2B)(a) omitted (with effect in accordance with art. 1(4) of the amending S.I.) by virtue of The Finance Act 2002, Schedule 26, Parts 2 and 9 (Amendment No. 2) Order 2005 (S.I. 2005/2082), arts. 1(2), 5(4)(a)

F37 Word in Sch. 26 para. 4(2B)(b) inserted (with effect in accordance with art. 1 of the amending S.I.) by The Finance Act 2002, Schedule 26 (Parts 2 and 9) (Amendment No. 3) Order 2005 (S.I. 2005/3440), arts. 1, 5(5)(a)

F38 Sch. 26 para. 4(2B)(b)(ii) and preceding word inserted (with effect in accordance with art. 1 of the amending S.I.) by The Finance Act 2002, Schedule 26 (Parts 2 and 9) (Amendment No. 3) Order 2005 (S.I. 2005/3440), arts. 1, 5(5)(b)

F39 Words in Sch. 26 para. 4(2B)(b)(ii) inserted (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, 6(4)(a)

F40 Words in Sch. 26 para. 4(2B)(c) 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, 6(4)(b)

F41 Sch. 26 para. 4(2C)(2D) 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), 5(5)

F42 Word in Sch. 26 para. 4(2C)(b) substituted (19.7.2007) by Finance Act 2007 (c. 11), Sch. 26 para. 9

F43 Sch. 26 para. 4(2CA) inserted (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, 6(5)

F44 Words in Sch. 26 para. 4(2D)(a)(ii) inserted (with effect in accordance with art. 1 of the amending S.I.) by The Finance Act 2002, Schedule 26 (Parts 2 and 9) (Amendment No. 3) Order 2005 (S.I. 2005/3440), arts. 1, 5(6)

F45 Sch. 26 para. 4(3) 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), 4(4)

F46 Sch. 26 para. 4(5) 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), 4(4)

Contracts which become derivative contracts: chargeable assets U.K.

[F47 4A. (1) This paragraph applies to a company if the conditions in sub-paragraph (2) are satisfied in relation to a relevant contract.

(2) The conditions are—

(a) the company is a party to the relevant contract both immediately before and at 3.00 p.m. on 16th March 2005;

(b) the relevant contract—

(i) was not a derivative contract immediately before 3.00 p.m. on 16th March 2005, but

(ii) as from that time is a derivative contract; and

(c) the relevant contract was, immediately before 3.00 p.m. on 16th March 2005, a chargeable asset.

(3) Where this paragraph applies, the company shall, when it ceases to be a party to the contract, bring into account, for the accounting period in which it ceased to be a party to the contract, the amount of any chargeable gain or allowable loss which would have been treated as accruing to the company on the assumption—

(a) that it had made a disposal of the asset immediately before 3.00 p.m. on 16th March 2005, and

(b) that the disposal had been for a consideration equal to the value (if any) given to the contract in the accounts of the company at the end of the company’s accounting period immediately before its first new period.

(4) For the purposes of this paragraph an asset is a chargeable asset if any gain accruing on the disposal of the asset by the company would be a chargeable gain for the purposes of the [F48 TCGA 1992] (and includes any obligations under futures contracts which, by virtue of section 143 of that Act, are regarded as assets to the disposal of which that Act applies.]

Textual Amendments

F47 Sch. 26 para. 4A inserted (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 2005 (S.I. 2005/646), arts. 1(1), 5

F48 Words in Sch. 26 para. 4A(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, 30

[F49 4B. (1) This paragraph applies to a company if the conditions in sub-paragraph (2) are satisfied in relation to a relevant contract. U.K.

(2) The conditions are—

(a) the company is a party to the relevant contract both immediately before and on 28th July 2005,

(b) the relevant contract—

(i) was not a derivative contract immediately before that date, but

(ii) would (apart from this paragraph) be a derivative contract on that date, if an accounting period of the company began on that date, and

(c) the relevant contract was a chargeable asset immediately before that date.

(3) The company shall, when it ceases to be a party to the relevant contract, bring into account, for the accounting period in which it ceased to be a party to the contract, the amount of any chargeable gain or allowable loss which would have been treated as accruing to the company on the assumption—

(a) that it had made a disposal of the relevant contract immediately before 28th July 2005, and

(b) that the disposal had been for a consideration equal to the fair value of the relevant contract on that date.

(4) The relevant contract shall be treated for the purposes of this Schedule as a derivative contract entered into by the company on 28th July 2005 for a consideration equal to the fair value of the contract on that date.

(5) Sub-paragraph (4) of paragraph 4A (meaning of chargeable asset) also applies for the purposes of this paragraph.]

Textual Amendments

F49 Sch. 26 paras. 4B, 4C inserted (with effect in accordance with art. 1(5)(b) 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(5)(a), 6

Treatment of credits and debits on former chargeable asset U.K.

[F50 4D. (1) This paragraph applies if—

(a) a company is party to a plain vanilla contract which (not having been a derivative contract) became a derivative contract before 30th December 2006,

(b) the company disposes of the derivative contract by ceasing to be a party to it, and

(c) paragraphs 4A and 4B do not apply in relation to the contract.

(2) For the purposes of computing any chargeable gain accruing to the company on the disposal—

(a) paragraph 1(2) does not apply; and

(b) the sums allowable as a deduction under section 38(1)(a) of TCGA 1992 (acquisition costs) shall—

(i) if G exceeds L, be increased by the amount of that excess, and

(ii) if L exceeds G, be reduced by the amount of that excess.

(3) If the amount of the excess in sub-paragraph (2)(b)(ii) is greater than the amount of expenditure allowable under section 38(1)(a) of TCGA 1992, the amount of the excess that cannot be deducted from the expenditure shall, for the purpose mentioned in sub-paragraph (2), be added to the amount of the consideration for the disposal.

(4) In this paragraph—

• G is the sum of the credits brought into account under paragraph 14(3) in respect of the derivative contract in each relevant accounting period, and

• L is the sum of the debits brought into account under paragraph 14(3) in respect of the derivative contract in each relevant accounting period.

(5) For the purposes of sub-paragraph (4) a “relevant accounting period” is—

(a) the accounting period in which the disposal is made, or

(b) any previous accounting period.]

Textual Amendments

F50 Sch. 26 para. 4D substituted for Sch. 26 para. 4C (with effect in accordance with art. 1(2)(3) 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, 7

F51 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Textual Amendments

F51 Sch. 26 para. 5 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), 6

F52 5A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Textual Amendments

F52 Sch. 26 para. 5A 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), 6

F53 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Textual Amendments

F53 Sch. 26 para. 6 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), 6

F54 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Textual Amendments

F54 Sch. 26 para. 7 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), 6

F55 8 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Textual Amendments

F55 Sch. 26 para. 8 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), 6

Underlying subject matter which is subordinate or of small value disregarded U.K.

9 (1) This paragraph applies in relation to a relevant contract which falls within any of [F56 sub-paragraph (2) F57 ...] .

(2) A relevant contract falls within this sub-paragraph if its underlying subject matter consists of—

(a) any one or more of the excluded types of property falling within paragraphs [F58 (a) or (b)] of sub-paragraph (2) of paragraph (4) F59 ..., and

(b) other underlying subject matter which is—

(i) subordinate in relation to any of the property referred to in paragraph (a), or

(ii) of small value in comparison with the value of the underlying subject matter as a whole.

F60 (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F61 (4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(5) Where this paragraph applies in relation to a relevant contract, its underlying subject matter shall be treated for the purposes of this Schedule as if it consisted wholly of—

(a) in the case of a relevant contract falling within sub-paragraph (2), the excluded types of property referred to in paragraph (a) of that sub-paragraph, F62 ...

F63 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F64 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(6) For the purposes of this paragraph whether part of the underlying subject matter of a relevant contract of a company is subordinate or of small value is to be determined by reference to the time when the company enters into or acquires the relevant contract.

Textual Amendments

F56 Words in Sch. 26 para. 9(1) substituted (with effect in accordance with art. 1(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), 11(a)

F57 Words in Sch. 26 para. 9(1) 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, 8(2)

F58 Words in Sch. 26 para. 9(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 2005 (S.I. 2005/646), arts. 1(1), 7(2)(a)

F59 Words in Sch. 26 para. 9(2)(a) 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), 7(2)(b)

F60 Sch. 26 para. 9(3) omitted (with effect in accordance with art. 1(3)(4) of the amending S.I.) by virtue of The Finance Act 2002, Schedule 26, Parts 2 and 9 (Amendment) Order 2004 (S.I. 2004/2201), arts. 1(1), 11(c)

F61 Sch. 26 para. 9(4) 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, 8(3)

F62 Word in Sch. 26 para. 9(5)(a) 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, 8(4)(a)

F63 Sch. 26 para. 9(5)(b) omitted (with effect in accordance with art. 1(3)(4) of the amending S.I.) by virtue of The Finance Act 2002, Schedule 26, Parts 2 and 9 (Amendment) Order 2004 (S.I. 2004/2201), arts. 1(1), 11(e)(ii)

F64 Sch. 26 para. 9(5)(c) 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, 8(4)(b)

F65 10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Textual Amendments

F65 Sch. 26 para. 10 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), 8

Meaning of “underlying subject matter” U.K.

11 (1) [F66 In this Schedule] references to the underlying subject matter of a relevant contract are to be construed in accordance with this paragraph.

(2) The underlying subject matter of an option is—

(a) the property which would fall to be delivered if the option were exercised, or

(b) where the property which would so fall to be delivered is a derivative contract, the underlying subject matter of that derivative contract.

(3) The underlying subject matter of a future is—

(a) the property which, if the future were to run to delivery, would fall to be delivered at the date and price agreed when the contract is made, or

(b) where the property which would so fall to be delivered is a derivative contract, the underlying subject matter of that derivative contract.

(4) The underlying subject matter of a contract for differences is—

(a) where the contract for differences relates to fluctuations in the value or price of property described in the contract, the property so described, or

(b) where an index or factor is designated in the contract for differences, the matter by reference to which the index or factor is determined.

(5) In the case of a contract for differences, its underlying subject matter may include—

(a) interest rates;

(b) weather conditions;

(c) creditworthiness.

(6) Interest rates are not the underlying subject matter of a relevant contract in a case where, under the terms of that contract,—

(a) the date on which a party to that contract becomes subject to a duty to make a payment is a variable date, and

(b) the amount of that payment varies according to the date of payment,

and the terms of the relevant contract refer to an interest rate or rates for the purpose only of establishing that amount.

[F67 (7) Where the underlying subject matter of a relevant contract consists of or includes income from any of the following—

(a) land (wherever situated),

(b) shares in a company,

(c) rights of a unit holder under a unit trust scheme,

the underlying subject matter shall not be treated, by reason only of that income, as being land or such shares or rights (as the case may be).]

Textual Amendments

F66 Words in Sch. 26 para. 11(1) 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), 7

F67 Sch. 26 para. 11(7) added (with effect in accordance with art. 1(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), 12

Definition of terms relating to derivative contracts U.K.

12 [F68 (1) This paragraph defines the following expressions for the purposes of this Schedule—

• a capital redemption policy (see sub-paragraph (2));

• a contract for differences (see sub-paragraphs (3) to (5));

• a depositary receipt (in relation to shares) (see sub-paragraph (17));

• designated (see sub-paragraph (13));

• a future (see sub-paragraphs (6), (7) and (10));

• a hedging relationship between a relevant contract and an asset or liability, in the case of any company (see sub-paragraph (14));

• F69 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

• intangible fixed assets (see sub-paragraph (11));

• F70 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

• loan-contract embedded derivative (see sub-paragraph (11A));

• loan-contract host contract (see sub-paragraph (11B));

• F69 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

• an option (see sub-paragraphs (8) and (10));

• original asset (see sub-paragraph (11C));

• original creditor relationship (see sub-paragraph (11D));

• shares in a company (see sub-paragraph (12));

• a warrant (see sub-paragraph (9)).]

(2) A “capital redemption policy” is a contract effected in the course of capital redemption business (within the meaning of [F71 Chapter 1 of Part 12] of the Taxes Act 1988).

(3) A “contract for differences” is a contract the purpose or pretended purpose of which is to make a profit or avoid a loss by reference to fluctuations in—

(a) the value or price of property described in the contract, or

(b) an index or other factor designated in the contract.

(4) For the purposes of sub-paragraph (3)(b) an index or factor may be determined by reference to any matter and, for those purposes, a numerical value may be attributed to any variation in a matter.

(5) None of the following is a contract for differences—

(a) a future;

(b) an option;

(c) a contract of insurance;

(d) a capital redemption policy;

(e) a contract of indemnity;

(f) a guarantee;

(g) a warranty;

(h) a loan relationship.

(6) A “future” is a contract for the sale of property under which delivery is to be made—

(a) at a future date agreed when the contract is made, and

(b) at a price so agreed.

(7) For the purposes of sub-paragraph (6)(b) a price is to be taken to be agreed when the contract is made—

(a) notwithstanding that it is left to be determined by reference to the price at which a contract is to be entered into on a market or exchange or could be entered into at a time and place specified in the contract; or

(b) in a case where the contract is expressed to be by reference to a standard lot and quality, notwithstanding that provision is made for a variation in the price to take account of any variation in quantity or quality on delivery.

(8) An “option” includes a warrant.

(9) A “warrant” is an instrument which entitles the holder to subscribe for shares in a company or assets representing a loan relationship of a company; and for these purposes it is immaterial whether the shares or assets to which the warrant relates exist or are identifiable.

(10) References to a future or option do not include references to a contract whose terms provide—

(a) that, after setting off their obligations to each other under the contract, a cash payment is to be made by one party to the other in respect of the excess, if any, or

(b) that each party is liable to make to the other party a cash payment in respect of all that party’s obligations to the other under the contract,

and do not provide for the delivery of any property.

Nothing in this sub-paragraph has effect to exclude, from references to a future or option, references to a future or option whose underlying subject matter is currency.

[F72 (11) “Intangible fixed assets” has the same meaning as in Schedule 29 to this Act; and paragraphs 73 to 76 of that Schedule (and paragraph 72 of that Schedule so far as it relates to those paragraphs) have effect for the purposes of this Part as they have effect for the purposes of that Schedule.]

[F73 (11A) ”Loan-contract embedded derivative” means a contract to which a company is treated as party by virtue of section 94A(2)(b) of the Finance Act 1996.

(11B) ”Loan-contract host contract” means a loan relationship to which a company is treated as party by virtue of section 94A(2)(a) of the Finance Act 1996.

(11C) ”Original asset” means an asset representing an original creditor relationship.

(11D) ”Original creditor relationship” means a loan relationship to which—

(a) a company is creditor, and

(b) section 94A of the Finance Act 1996 applies.]

[F74 (12) “Share”, in relation to a company, means any share in the company under which an entitlement to receive distributions may arise; and any reference to a share includes a reference to each of the following—

(a) a depositary receipt for shares under which such an entitlement may arise;

(b) in the case of a company that has no share capital, any interests in the company possessed by members of the company;]

[F75 (13) “Designated”[F76 , except in paragraph 45G,] has the same meaning as for accounting purposes.

(14) A company has a hedging relationship between a relevant contract on the one hand (“the hedging instrument”) and an asset [F77 or a liability] on the other (“the hedged item”) if and to the extent that—

(a) the hedging instrument and the hedged item are designated by the company as a hedge; or

[F78 (b) in any other case—

(i) the hedging instrument is intended to act as a hedge of the exposure to changes in fair value of the hedged item that is attributable to a particular risk and could affect the profit or loss of the company, and

(ii) the hedged item is an asset or liability recognised for accountancy purposes or is an identified portion of such an asset or liability.]

[F79 For the purposes of this sub-paragraph the liabilities of a company include its own share capital.]

F80 (15) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F80 (16) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .]

[F81 (17) “Depositary receipt”, in relation to shares (within the meaning of this Schedule) has the same meaning as it has in Part 4 of the Finance Act 1986 in relation to shares (within the meaning of that Part).]

Textual Amendments

F68 Sch. 26 para. 12(1) 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, 9(2)

F69 Words in Sch. 26 para. 12(1) repealed (with effect in accordance with Sch. 10 para. 17(2) to the amending Act) by Finance Act 2007 (c. 11), Sch. 10 para. 14(10)(d)(i), Sch. 27 Pt. 2(10)

F70 Words in Sch. 26 para. 12(1) omitted (with effect in accordance with art. 1(2) of the amending S.I.) by virtue of The Insurance Companies (Corporation Tax Acts) (Miscellaneous Amendments) Order 2006 (S.I. 2006/3270), arts. 1(1), 11(b)(ii)

F71 Words in Sch. 26 para. 12(2) substituted (with effect in accordance with s. 38(2) of the amending Act) by Finance Act 2007 (c. 11), Sch. 7 para. 75(2) (with Sch. 7 Pt. 2)

F72 Sch. 26 para. 12(11) 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 2004 (S.I. 2004/2201), arts. 1(1), 13(3)

F73 Sch. 26 para. 12(11A)-(11D) inserted (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, 9(3)

F74 Sch. 26 para. 12(12) 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), 8(3)

F75 Sch. 26 para. 12(13)-(16) added (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 2005 (S.I. 2005/646), arts. 1(1), 9(3)

F76 Words in Sch. 26 para. 12(13) inserted (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, 9(4)

F77 Words in Sch. 26 para. 12(14) inserted (with effect in accordance with art. 1 of the amending S.I.) by The Finance Act 2002, Schedule 26 (Parts 2 and 9) (Amendment No. 3) Order 2005 (S.I. 2005/3440), arts. 1, 6(3)(a)

F78 Sch. 26 para. 12(14)(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, 9(5)

F79 Words in Sch. 26 para. 12(14) added (with effect in accordance with art. 1 of the amending S.I.) by The Finance Act 2002, Schedule 26 (Parts 2 and 9) (Amendment No. 3) Order 2005 (S.I. 2005/3440), arts. 1, 6(3)(c)

F80 Sch. 26 para. 12(15)(16) repealed (with effect in accordance with Sch. 10 para. 17(2) to the amending Act) by Finance Act 2007 (c. 11), Sch. 10 para. 14(10)(d)(ii), Sch. 27 Pt. 2(10)

F81 Sch. 26 para. 12(17) 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), 8(4)

Modifications etc. (not altering text)

C1 Sch. 26 para. 12(6)-(10) applied by 1992 c. 12, s. 275B(3) (as inserted (with effect in accordance with Sch. 4 para. 10(1) of the amending Act) by Finance (No. 2) Act 2005 (c. 22), Sch. 4 para. 5)

C2 Sch. 26 para. 12(14) applied by 1996 c. 8, Sch. 9 para. 12A(9) (as inserted (with effect in accordance with Sch. 7 para. 18(2) of the amending Act) by Finance (No. 2) Act 2005 (c. 22), Sch. 7 para. 18)

[F82 Power to amend paragraphs 2 to 12 and Part 9] U.K.

13 [F83 (1) The Treasury may by order amend—

(a) any of paragraphs 2 to 12, or

(b) Part 9 of this Schedule.]

(2) The provision that may be made by an order under this paragraph includes provision—

(a) adding to, or varying, the descriptions of contract which are derivative contracts within paragraph 2 or removing any such description of contract, or

(b) adding to, or varying, the descriptions of contracts which are excluded under paragraph 4 or removing any such description of contract.

(3) The provision that may be made under sub-paragraph (2)(b), in relation to contracts which are excluded under paragraph 4, includes provision adding to, or varying, the provisions which qualify the exclusion of contracts under that paragraph or removing any such qualifying provision.

[F84 (4) An order under this paragraph may provide for any of its provisions to have effect in relation to accounting periods ending on or after the day on which the order comes into force (whenever beginning).]

(5) The power to make an order under this paragraph includes power—

(a) to make different provision for different cases, and

(b) to make such consequential, supplementary, incidental or transitional provisions, or savings, as appear to the Treasury to be necessary or expedient (including provision amending any enactment or any instrument made under an enactment).

Textual Amendments

F82 Sch. 26 para. 13 heading substituted (22.7.2004) by Finance Act 2004 (c. 12), Sch. 9 para. 2(4)

F83 Sch. 26 para. 13(1) substituted (22.7.2004) by Finance Act 2004 (c. 12), Sch. 9 para. 2(2)

F84 Sch. 26 para. 13(4) substituted (22.7.2004) by Finance Act 2004 (c. 12), Sch. 9 para. 2(3)