Finance Act 2002 (c. 23)

SCHEDULES

Section 83

SCHEDULE 26 U.K. Derivative contracts

Modifications etc. (not altering text)

C1 Sch. 26 modified by 1996 c. 8, s. 86(3C) (as inserted (24.7.2002 with effect as mentioned in s. 82(2) of the amending Act) by 2002 c. 23, s. 82, Sch. 25 Pt. 1 para. 6(3))

C2 Sch. 26 extended (retrospective to 30.9.2002) by Finance Act 2003 (c. 14), s. 177(4)(8)(11)

C3 Sch. 26 applied by 1988 c. 1, s. 440(2B) (as amended (with effect in accordance with s. 52(3) of the amending Act) by Finance Act 2004 (c. 12), Sch. 10 para. 70)

C4 Sch. 26 modified by 1996 c. 8, s. 94A (as inserted (with effect in accordance with s. 52(3) of the amending Act) by Finance Act 2004 (c. 12), Sch. 10 para. 13)

C5 Sch. 26 applied (with modifications) (5.10.2004) by Energy Act 2004 (c. 20), s. 198(2), Sch. 9 para. 24 (with s. 38(2)); S.I. 2004/2575, art. 2(1), Sch. 1

C6 Sch. 26 applied (with modifications) (5.10.2004) by Energy Act 2004 (c. 20), s. 198(2), Sch. 9 para. 12 (with s. 38(2)); S.I. 2004/2575, art. 2(1), Sch. 1

C7 Sch. 26 modified (8.6.2005) by Railways Act 2005 (c. 14), s. 60(2), Sch. 10 para. 7; S.I. 2005/1444, art. 2(1), Sch. 1

C8 Sch. 26 modified (8.6.2005) by Railways Act 2005 (c. 14), s. 60(2), Sch. 10 para. 19; S.I. 2005/1444, art. 2(1), Sch. 1

C9 Sch. 26 modified (19.7.2006) by Finance Act 2006 (c. 25), s. 136(2)(e)

Part 1 U.K. Introduction

Profits arising from derivative contracts U.K.

1 (1) For the purposes of corporation tax all profits arising to a company from its derivative contracts shall be chargeable to tax as income in accordance with this Schedule.

(2) Except where otherwise indicated, the amounts to be brought into account in accordance with this Schedule in respect of any matter are the only amounts to be brought into account for the purposes of corporation tax in respect of that matter.

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) is treated for accounting purposes as, or as forming part of, a financial asset or liability, or]

F7 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(c) in the case of a relevant contract which [F8 does not fall within] paragraph (a) [F9 or (b)] F10 ..., it falls within sub-paragraph (2).

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

(a) its underlying subject matter is commodities, or

[F11 (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, [F12 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 F13 ... 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 [F14 which used a relevant] accounting standard in respect of the relevant contract).

[F15 (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).]

F16 (4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(5) [F17 In this paragraph “relevant accounting standard” means—]

F18 (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

[F19 (aa) in relation to any accounting period for which it is required or permitted to be used F20 ..., 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 F21 ..., any subsequent accounting standard dealing with transactions which are [F22 derivatives] F23 ... under Financial Reporting Standard [F24 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 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)

F8 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)

F9 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)

F10 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)

F11 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)

F12 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)

F13 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)

F14 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)

F15 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)

F16 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)

F17 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)

F18 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)

F19 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)

F20 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)

F21 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)

F22 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)

F23 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)

F24 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.

F25 (1A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

[F26 (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 [F27 (2A), (2B), (2C)[F28 , (2CA)] or (2D)]—

(i) shares in a company, [F29 other than shares excluded by sub-paragraph (2ZA); or]

(ii) rights of a unit holder under a unit trust scheme [F30 other than a scheme to which paragraph 4 of Schedule 10 to the Finance Act 1996 applies].

[F31 (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.]

[F32 (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 [F33 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, F34 ...

(b) there is a hedging relationship between the contract and[F35 —

(i)] an asset of the company which consists of shares or rights of a unit holder under a unit trust scheme, [F36 or

(ii) any share capital of the company [F37 or any liability related to share capital of the company],] and

(c) the relevant contract is not [F38 a loan-contract embedded derivative.]]

[F39 (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, [F40 listed] on a recognised stock exchange, to subscribe for shares in a company.

[F41 (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 [F42 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.]

F43 (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.

F44 (5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Textual Amendments

F25 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)

F26 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)

F27 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)

F28 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)

F29 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)

F30 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)

F31 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)

F32 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)

F33 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)

F34 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)

F35 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)

F36 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)

F37 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)

F38 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)

F39 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)

F40 Word in Sch. 26 para. 4(2C)(b) substituted (19.7.2007) by Finance Act 2007 (c. 11), Sch. 26 para. 9

F41 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)

F42 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)

F43 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)

F44 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.

[F45 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 [F46 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

F45 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

F46 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

[F47 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

F47 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.

[F48 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

F48 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

F49 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Textual Amendments

F49 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

F50 5A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Textual Amendments

F50 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

F51 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Textual Amendments

F51 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

F52 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Textual Amendments

F52 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

F53 8 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Textual Amendments

F53 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 [F54 sub-paragraph (2) F55 ...] .

(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 [F56 (a) or (b)] of sub-paragraph (2) of paragraph (4) F57 ..., 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.

F58 (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F59 (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, F60 ...

F61 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F62 (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

F54 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)

F55 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)

F56 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)

F57 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)

F58 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)

F59 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)

F60 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)

F61 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)

F62 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)

F63 10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Textual Amendments

F63 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) [F64 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.

[F65 (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

F64 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

F65 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 [F66 (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));

• F67 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

• F68 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

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

• F67 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

• 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 [F69 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.

[F70 (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.]

[F71 (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.]

[F72 (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;]

[F73 (13) “Designated”[F74 , 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 [F75 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

[F76 (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.]

[F77 For the purposes of this sub-paragraph the liabilities of a company include its own share capital.]

F78 (15) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F78 (16) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .]

[F79 (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

F66 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)

F67 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)

F68 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)

F69 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)

F70 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)

F71 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)

F72 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)

F73 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)

F74 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)

F75 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)

F76 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)

F77 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)

F78 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)

F79 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)

C10 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)

C11 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)

[F80 Power to amend paragraphs 2 to 12 and Part 9] U.K.

13 [F81 (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.

[F82 (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

F80 Sch. 26 para. 13 heading substituted (22.7.2004) by Finance Act 2004 (c. 12), Sch. 9 para. 2(4)

F81 Sch. 26 para. 13(1) substituted (22.7.2004) by Finance Act 2004 (c. 12), Sch. 9 para. 2(2)

F82 Sch. 26 para. 13(4) substituted (22.7.2004) by Finance Act 2004 (c. 12), Sch. 9 para. 2(3)

Part 3 U.K. Method of taxation

Method of bringing amounts into account U.K.

14 (1) For the purposes of corporation tax the profits and losses arising from the derivative contracts of a company shall be computed in accordance with this paragraph using the credits and debits given for the accounting period in question by the following provisions of this Schedule.

(2) To the extent that, in any accounting period, a derivative contract of a company is one to which the company is party for the purposes of a trade carried on by it, the credits and debits given in respect of that contract for that period shall be treated (according to whether they are credits or debits) either—

(a) as receipts of that trade falling to be brought into account in computing the profits of that trade for that period; or

(b) as expenses of that trade which are deductible in computing those profits.

(3) Where for any accounting period there are, in respect of the derivative contracts of a company, credits and debits that are not brought into account under sub-paragraph (2), they shall be brought into account for that accounting period as if they were non-trading credits or non-trading debits falling to be brought into account for the purposes of Chapter 2 of Part 4 of the Finance Act 1996 (c. 8) in respect of loan relationships of the company.

(4) Sub-paragraph (2), so far as it provides for any amount to be deductible as mentioned in paragraph (b) of that sub-paragraph, shall have effect notwithstanding anything in section 74 of the Taxes Act 1988 (allowable deductions).

Credits and debits brought into account U.K.

15 (1) The credits and debits to be brought into account in the case of any company in respect of its derivative contracts shall be the sums which, F83 ... when taken together, fairly represent, for the accounting period in question—

(a) all profits and losses of the company which (disregarding any charges or expenses) arise to the company from its derivative contracts and related transactions; and

(b) all charges and expenses incurred by the company under or for the purposes of its derivative contracts and related transactions.

F84 (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F85 (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(4) The reference in sub-paragraph (1)(b) to charges and expenses incurred for the purposes of a company’s derivative contracts and related transactions does not include a reference to any charges or expenses other than those incurred directly—

(a) in bringing any of those contracts into existence;

(b) in entering into or giving effect to any of those transactions;

(c) in making payments under any of those contracts or in pursuance of any of those transactions; or

(d) in taking steps for ensuring the receipt of payments under any of those contracts or in accordance with any of those transactions.

(5) Where—

(a) any charges or expenses are incurred by a company for purposes connected—

(i) with entering into a derivative contract or related transaction, or

(ii) with giving effect to any obligation that might arise under a derivative contract or related transaction,

(b) at the time when the charges or expenses are incurred, the contract or transaction is one into which the company may enter but has not entered, and

(c) if that contract or transaction had been entered into by that company, the charges or expenses would be charges or expenses incurred as mentioned in sub-paragraph (4),

those charges or expenses shall be treated for the purposes of this Schedule as charges or expenses in relation to which debits may be brought into account in accordance with sub-paragraph (1)(b) to the same extent as if the contract or transaction had been entered into.

F86 (6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(7) In this Schedule “related transaction”, in relation to a derivative contract, means any disposal or acquisition (in whole or in part) of rights or liabilities under the derivative contract.

(8) The cases where there shall be taken for the purposes of sub-paragraph (7) to be a disposal or acquisition of rights or liabilities under a derivative contract shall include—

(a) those where such rights or liabilities are transferred or extinguished by any sale, gift, surrender or release, and

(b) those where the contract is discharged by performance in accordance with its terms.

(9) This paragraph has effect subject to [F87 the following provisions of this Schedule].

Textual Amendments

F83 Words in Sch. 26 para. 15(1) repealed (with effect in accordance with s. 52(3) of the amending Act) by Finance Act 2004 (c. 12), Sch. 10 para. 47(2), Sch. 42 Pt. 2(6)

F84 Sch. 26 para. 15(2) repealed (with effect in accordance with s. 52(3) of the amending Act) by Finance Act 2004 (c. 12), Sch. 10 para. 47(3), Sch. 42 Pt. 2(6)

F85 Sch. 26 para. 15(3) repealed (with effect in accordance with s. 52(3) of the amending Act) by Finance Act 2004 (c. 12), Sch. 10 para. 47(3), Sch. 42 Pt. 2(6)

F86 Sch. 26 para. 15(6) repealed (with effect in accordance with s. 52(3) of the amending Act) by Finance Act 2004 (c. 12), Sch. 10 para. 47(3), Sch. 42 Pt. 2(6)

F87 Words in Sch. 26 para. 15(9) substituted (with effect in accordance with s. 52(3) of the amending Act) by Finance Act 2004 (c. 12), Sch. 10 para. 47(4)

Exchange gains and losses arising from derivative contracts U.K.

16 (1) The reference in paragraph 15(1)(a) to the profits and losses arising to a company from its derivative contracts and related transactions includes a reference to exchange gains and losses arising to the company from its derivative contracts.

(2) Sub-paragraph (1) is subject to the following provisions of this paragraph.

[F88 (3) Sub-paragraph (1) does not apply to an exchange gain or loss of a company to the extent that it—

(a) arises in relation to a derivative contract whose underlying subject matter consists wholly or partly of currency, or

(b) results from the translation from one currency to another of the profit or loss of part of the company’s business,

and is recognised in the company’s statement of recognised gains and losses or statement of changes in equity.

(3A) Sub-paragraph (1) above does not apply to so much of an exchange gain or loss arising to a company, in relation to a derivative contract whose underlying subject matter consists wholly or partly of currency, as falls within a description prescribed for the purpose in regulations made by the Treasury.]

F89 (4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F89 (5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F89 (6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F89 (7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(8) The Treasury may by regulations make provision for or in connection with bringing into account in prescribed circumstances amounts in relation to which sub-paragraph (1) does not, by virtue of sub-paragraph (3) [F90 or (3A)], have effect.

(9) The reference in sub-paragraph (8) to bringing amounts into account is a reference to bringing amounts into account—

(a) for the purposes of this Schedule, as credits or debits arising to a company from its derivative contracts and related transactions; or

(b) for the purposes of the Taxation of Chargeable Gains Act 1992 (c. 12).

(10) Any power to make regulations under this paragraph includes power to make different provision for different cases [F91 and power to make provision subject to an election or to other prescribed conditions].

Textual Amendments

F88 Sch. 26 para. 16(3)(3A) substituted for Sch. 26 para. 16(3) (with effect in accordance with s. 52(3) of the amending Act) by Finance Act 2004 (c. 12), Sch. 10 para. 48(2)

F89 Sch. 26 para. 16(4)-(7) repealed (with effect in accordance with s. 52(3) of the amending Act) by Finance Act 2004 (c. 12), Sch. 10 para. 48(3), Sch. 42 Pt. 2(6)

F90 Words in Sch. 26 para. 16(8) inserted (with effect in accordance with s. 52(3) of the amending Act) by Finance Act 2004 (c. 12), Sch. 10 para. 48(4)

F91 Words in Sch. 26 para. 16(10) added (with effect in accordance with s. 52(3) of the amending Act) by Finance Act 2004 (c. 12), Sch. 10 para. 48(5)

Modifications etc. (not altering text)

C12 Sch. 26 para. 16(3) excluded by S.I. 2004/3256, reg. 7(4) (as inserted (with effect in accordance with reg. 1(2) of the amending S.I.) by The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment) Regulations 2005 (S.I. 2005/2012), regs. 1(1), 8(5))

Part 4 U.K. [F92 Computation of amounts to be brought into account]

Textual Amendments

F92 Words in Sch. 26 Pt. 4 heading substituted (with effect in accordance with s. 52(3) of the amending Act) by Finance Act 2004 (c. 12), Sch. 10 para. 49

Computation in accordance with generally accepted accounting practice U.K.

[F93 17A (1) Subject to the provisions of this Schedule [F94 (including, in particular, paragraph 15(1))], the amounts to be brought into account by a company for any period for the purposes of this Schedule are those that, in accordance with generally accepted accounting practice, are recognised in determining the company’s profit or loss for the period.

[F95 (1A) But, in the case of a contract which is a derivative contract for the purposes of this Schedule by virtue of paragraph 3(1)(b) (contracts treated for accounting purposes as financial asset or liability), the amounts to be so brought into account as respects the contract must be determined on the basis of fair value accounting.]

(2) If a company does not draw up accounts in accordance with generally accepted accounting practice (“correct accounts”)—

(a) the provisions of this Schedule apply as if correct accounts had been drawn up, and

(b) the amounts referred to in this Schedule as being recognised for accounting purposes are those that would have been recognised if correct accounts had been drawn up.

(3) If a company draws up accounts that rely to any extent on amounts derived from an earlier period of account for which the company did not draw up correct accounts, the amounts referred to in this Schedule as being recognised for accounting purposes in the later period are those that would have been recognised if correct accounts had been drawn up for the earlier period.

(4) The provisions of sub-paragraphs (2) and (3) apply where the company does not draw up accounts at all as well as where it draws up accounts that are not correct.

Textual Amendments

F93 Sch. 26 paras. 17A-17C substituted for Sch. 26 paras. 17-20 (with effect in accordance with s. 52(3) of the amending Act) by Finance Act 2004 (c. 12), Sch. 10 para. 50

F94 Words in Sch. 26 para. 17A(1) inserted (19.7.2006) by Finance Act 2006 (c. 25), Sch. 6 para. 21(2)

F95 Sch. 26 para. 17A(1A) inserted (with effect in accordance with Sch. 5 para. 18(2)-(4) to the amending Act) by Finance Act 2007 (c. 11), Sch. 5 para. 18(1)

Amounts recognised in determining company’s profit or loss U.K.

17B (1) Any reference in this Schedule to an amount being recognised in determining a company’s profit or loss for a period is to an amount being recognised for accounting purposes—

(a) in the company’s profit and loss account [F96 or income statement],

(b) in the company’s statement of recognised gains and losses or statement of changes in equity, or

(c) in any other statement of items brought into account in computing the company’s profits and losses for that period.

[F97 (2) An amount that in accordance with generally accepted accounting practice is shown as a prior period adjustment in any such statement as is mentioned in sub-paragraph (1) shall be brought into account for the purposes of this Schedule in computing the company's profits and losses for the period to which the statement relates.

This does not apply to an amount recognised for accounting purposes by way of correction of a fundamental error.]

Textual Amendments

F93 Sch. 26 paras. 17A-17C substituted for Sch. 26 paras. 17-20 (with effect in accordance with s. 52(3) of the amending Act) by Finance Act 2004 (c. 12), Sch. 10 para. 50

F96 Words in Sch. 26 para. 17B(1)(a) inserted (17.4.2005) by Finance Act 2005 (c. 7), Sch. 4 para. 34(2)

F97 Sch. 26 para. 17B(2) substituted (17.4.2005) by Finance Act 2005 (c. 7), Sch. 4 para. 34(3)

Modifications etc. (not altering text)

C13 Sch. 26 para. 17B(1) modified (with effect in accordance with reg. 1 of the amending S.I.) by The Loan Relationships and Derivative Contracts (Exchange Gains and Losses using Fair Value Accounting) Regulations 2005 (S.I. 2005/3422), regs. 1, 9(5)

Power to make further provision by regulations U.K.

17C (1) The Treasury may by regulations make provision—

(a) excluding amounts of a prescribed description from paragraph 17B(1);

(b) requiring amounts of a prescribed description that do not fall within paragraph 17B (1) (by virtue of regulations under paragraph (a) above or otherwise) to be brought into account in determining a company’s profit or loss for a period in prescribed circumstances;

(c) as to the manner in which any such amounts are to be brought into account.

(2) The regulations may (in particular) make provision by reference to the fact that amounts derive from or otherwise relate to amounts brought into account in a prescribed manner in a previous period of account.

(3) The power to make regulations under this paragraph includes—

(a) power to make different provision for different cases; and

(b) power to make provision subject to an election or to other prescribed conditions.

(4) Regulations under this paragraph may apply, exclude or modify any of the provisions of this Schedule in relation to cases for which provision is made by the regulations.]

Textual Amendments

F93 Sch. 26 paras. 17A-17C substituted for Sch. 26 paras. 17-20 (with effect in accordance with s. 52(3) of the amending Act) by Finance Act 2004 (c. 12), Sch. 10 para. 50

Basis of accounting for contracts falling within paragraph 6, 7 or 8 U.K.

F98 21 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Textual Amendments

F98 Sch. 26 para. 21 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), 9

Part 5 U.K. Special provision for [F99 release of liability]

Textual Amendments

F99 Words in Sch. 26 Pt. 5 heading substituted (with effect in accordance with s. 52(3) of the amending Act) by Finance Act 2004 (c. 12), Sch. 10 para. 52

[F100 Release of liability under derivative contract ] U.K.

22 F101 (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F101 (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F101 (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F101 (4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(5) Where—

(a) in the case of a derivative contract of a company, a liability owed by the company to pay an amount under the contract is released, and

F102 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

no credit in respect of the release shall be required to be brought into account in the case of the company if the release is part of a [F103 statutory insolvency arrangement].

Textual Amendments

F100 Sch. 26 para. 22 heading substituted (with effect in accordance with s. 52(3) of the amending Act) by Finance Act 2004 (c. 12), Sch. 10 para. 53(2)

F101 Sch. 26 para. 22(1)-(4) repealed (with effect in accordance with s. 52(3) of the amending Act) by Finance Act 2004 (c. 12), Sch. 10 para. 53(3), Sch. 42 Pt. 2(6)

F102 Sch. 26 para. 22(5)(b) and preceding word repealed (with effect in accordance with s. 52(3) of the amending Act) by Finance Act 2004 (c. 12), Sch. 10 para. 53(4), Sch. 42 Pt. 2(6)

F103 Words in Sch. 26 para. 22(5) substituted (7.4.2005) by Finance Act 2005 (c. 7), Sch. 4 para. 19

Part 6 U.K. Special computational provisions

Deemed assignment of derivative contracts on company ceasing to be resident in UKetc U.K.

[F104 22A (1) This paragraph applies if at any time (“the relevant time”)—

(a) a company ceases to be resident in the United Kingdom, or

(b) in the case of a company not resident in the United Kingdom, the rights and liabilities of the company under a derivative contract to any extent cease to be held or owed for the purposes of a permanent establishment of the company in the United Kingdom in circumstances not involving a related transaction.

(2) In a case falling within sub-paragraph (1)(a), this Schedule shall have effect as if the company had—

(a) immediately before the relevant time, assigned its rights and liabilities under its derivative contracts for a consideration of an amount equal to their fair value at that time, and

(b) immediately reacquired them for a consideration of the same amount.

(3) Sub-paragraph (2) does not apply in relation to a derivative contract to the extent that, immediately after the relevant time, the company’s rights and liabilities under the contract are held or owed for the purposes of a permanent establishment of the company in the United Kingdom.

(4) In a case falling within sub-paragraph (1)(b), this Schedule shall have effect as if the company had—

(a) immediately before the relevant time, assigned the rights and liabilities, so far as ceasing to be held or owed for the purposes of the permanent establishment, for a consideration of an amount equal to their fair value at that time, and

(b) immediately reacquired them for a consideration of the same amount.

F105 (5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .]

Textual Amendments

F104 Sch. 26 para. 22A and cross-heading inserted (with effect in accordance with Sch. 9 para. 3(2) of the amending Act) by Finance Act 2004 (c. 12), Sch. 9 para. 3(1)

F105 Sch. 26 para. 22A(5) repealed (with effect in accordance with s. 52(3) of the amending Act) by Finance Act 2004 (c. 12), Sch. 10 para. 54, Sch. 42 Pt. 2(6)

Derivative contracts for unallowable purposes U.K.

23 (1) Where in any accounting period a derivative contract of a company has an unallowable purpose, this paragraph shall apply for the purpose of determining the credits and debits which fall, in the case of the company, to be brought into account for the purposes of this Schedule.

(2) Subject to sub-paragraph (4), the credits to be brought into account in the case of the derivative contract for the accounting period shall not include so much of the exchange credits F106 ... as respects the contract as, on a just and reasonable apportionment, is referable to the unallowable purpose.

(3) Subject to sub-paragraph (4), the debits to be brought into account in the case of the derivative contract for the accounting period shall not include so much of the debits F107 ... as respects the contract as, on a just and reasonable apportionment, is referable to the unallowable purpose.

(4) If, in the case of the derivative contract,—

(a) the amount of the debits referable to the unallowable purpose, in accordance with sub-paragraph (3), for that accounting period, exceeds

(b) the amount of the exchange credits referable to that purpose, in accordance with sub-paragraph (2), for that accounting period,

the difference between the amounts (the “net loss”) may be brought into account as a debit to the extent permitted by sub-paragraph (5).

(5) An amount of accumulated net losses may be brought into account for an accounting period if, and to the extent that, there is for that period an amount of accumulated credits (other than exchange credits).

(6) For the purposes of sub-paragraph (5) the amount of accumulated net losses is, in relation to an accounting period,—

(a) the amount of any net loss arising, in the case of the derivative contract, for that accounting period or any earlier accounting period, in accordance with sub-paragraph (4), less

(b) the amount of any such net loss as was brought into account in accordance with sub-paragraph (5) in any earlier accounting period.

(7) For the purposes of sub-paragraph (5) the amount of accumulated credits (other than exchange credits) is, in relation to an accounting period,—

(a) the amount of any credits (other than exchange credits) arising, in the case of the derivative contract, for that accounting period or any earlier accounting period, less

(b) an amount equal to [F108 —

(i) so much of any debits arising, in the case of the derivative contract, for that accounting period or any earlier accounting period as is not, in accordance with sub-paragraph (3), referable to the unallowable purpose, and

(ii)] to the amount of any net loss, arising in the case of the derivative contract, which was brought into account in accordance with sub-paragraph (5) in any earlier accounting period.

(8) Amounts which, by virtue of this paragraph, are not brought into account for the purposes of this Schedule as respects any matter are in consequence also amounts which, in accordance with paragraph 1(2), are not to be brought into account for the purposes of corporation tax as respects that matter apart from this Schedule.

(9) For the purposes of this paragraph, a credit is an exchange credit, in the case of a company, to the extent that it is attributable to any exchange gains arising to the company F109 ....

(10) This paragraph is supplemented by paragraph 24.24

Textual Amendments

F106 Words in Sch. 26 para. 23(2) repealed (with effect in accordance with s. 52(3) of the amending Act) by Finance Act 2004 (c. 12), Sch. 10 para. 55, Sch. 42 Pt. 2(6)

F107 Words in Sch. 26 para. 23(3) repealed (with effect in accordance with s. 52(3) of the amending Act) by Finance Act 2004 (c. 12), Sch. 10 para. 55, Sch. 42 Pt. 2(6)

F108 Words in Sch. 26 para. 23(7)(b)(i)(ii) inserted (with effect in accordance with Sch. 9 para. 4(2) of the amending Act) by Finance Act 2004 (c. 12), Sch. 9 para. 4(1)

F109 Words in Sch. 26 para. 23(9) repealed (with effect in accordance with Sch. 11 Pt. 2(6) Note 3 of the amending Act) by Finance (No. 2) Act 2005 (c. 22), Sch. 11 Pt. 2(6)

Derivative contracts for unallowable purposes: supplementary U.K.

24 (1) For the purposes of paragraph 23 a derivative contract to which a company is party shall be taken to have an unallowable purpose in an accounting period where the purposes for which, at times during that period, the company—

(a) is party to the contract, or

(b) enters into transactions which are related transactions by reference to that contract,

include a purpose (“the unallowable purpose”) which is not amongst the business or other commercial purposes of the company.

(2) For the purposes of this paragraph the business and other commercial purposes of a company do not include the purposes of any part of its activities in respect of which it is not within the charge to corporation tax.

(3) For the purposes of this paragraph, where one of the purposes for which a company—

(a) is party to a derivative contract at any time, or

(b) enters into a transaction which is a related transaction by reference to any derivative contract of the company,

is a tax avoidance purpose, that purpose shall be taken to be a business or other commercial purpose of the company only where it is not the main purpose, or one of the main purposes, for which the company is party to the contract at that time or, as the case may be, for which the company enters into that transaction.

(4) The reference in sub-paragraph (3) to a tax avoidance purpose is a reference to any purpose that consists in securing a tax advantage (whether for the company or any other person).

[F110 (5) In this paragraph “tax advantage” has the meaning given by section 840ZA of the Taxes Act 1988.]

Textual Amendments

F110 Sch. 26 para. 24(5) substituted (6.4.2007) by Income Tax Act 2007 (c. 3), s. 1034(1), Sch. 1 para. 422(2) (with Sch. 2)

Debits and credits treated as relating to capital expenditure U.K.

25 (1) This paragraph applies where any debit or credit F111 ... for any accounting period in respect of a company’s derivative contract is allowed by generally accepted accounting practice to be treated, in the accounts of the company, as an amount brought into account in determining the value of a fixed capital asset or project.

(2) Notwithstanding the application to it of the treatment allowed by generally accepted accounting practice, the debit or credit shall be brought into account for the purposes of corporation tax, for the accounting period for which it is given, in the same way as a debit or credit which, in accordance with generally accepted accounting practice, is brought into account in determining the company’s profit or loss for that period.

(3) No debit may be brought into account by virtue of this paragraph if it is taken into account in arriving at the amount of expenditure in relation to which a debit may be given by Schedule 29 to this Act.

[F112 (4) Where a debit is brought into account by a company in accordance with sub-paragraph (1), no debit shall be brought into account in respect of—

(a) the writing down of so much of the value of the fixed capital asset or project as is attributable to that debit, or

(b) so much of any amortisation or depreciation as represents a writing off of the interest component of the asset.]

Textual Amendments

F111 Words in Sch. 26 para. 25(1) repealed (with effect in accordance with s. 52(3) of the amending Act) by Finance Act 2004 (c. 12), Sch. 10 para. 56(2), Sch. 42 Pt. 2(6)

F112 Sch. 26 para. 25(4) added (with effect in accordance with s. 52(3) of the amending Act) by Finance Act 2004 (c. 12), Sch. 10 para. 56(3)

Debits and credits recognised in equity or shareholders' funds U.K.

[F113 25A Where in accordance with generally accepted accounting practice a debit or credit for a period in respect of a derivative contract of a company—

(a) is recognised in equity or shareholders' funds, and

(b) is not recognised in any of the statements mentioned in [F114 paragraph 17B(1)],

the debit or credit shall be brought into account for that period for the purposes of this Chapter in the same way as a debit or credit that, in accordance with generally accepted accounting practice, is brought into account in determining the company's profit or loss for that period.]

Textual Amendments

F113 Sch. 26 para. 25A inserted (7.4.2005) by Finance Act 2005 (c. 7), Sch. 4 para. 35

F114 Words in Sch. 26 para 25A substituted (retrospective to 7.4.2005) by Finance (No. 2) Act 2005 (c. 22), Sch. 6 para. 4(3)(6)

Transfers of value to connected companies U.K.

26 (1) This paragraph applies where—

(a) as a result of [F115 the failure to exercise in full all the rights under an option of a company which, until that failure,] was a derivative contract of the company, there is a transfer of value by the company (“the transferor”) to a company which is a connected company in relation to it (“the transferee”), and

(b) the transferee is not chargeable to corporation tax, in respect of the derivative contract, under or by virtue of this Schedule.

(2) In order to determine, for the purposes of sub-paragraph 1(a), whether there is a transfer of value, it shall be assumed that—

(a) if there had not been a connection between the transferor and the transferee, [F116 all the rights under the option would have been exercised in full], and

(b) if there had not been such a connection, [F117 all those rights would have been exercised in full on the latest date on which they were exercisable].

(3) Where this paragraph applies in relation to [F118 an option] of the transferor, the transferor shall bring the appropriate amount into account in accordance with paragraph 15 for the appropriate accounting period as a credit in respect of the derivative contract.

(4) In sub-paragraph (3)—

(a) the appropriate accounting period is the accounting period of the transferor in which the option expired [F119 or would have expired if none of the rights under it had been exercised], and

[F120 (b) the appropriate amount—

(i) if the option expired, is the amount (if any) paid by the transferor to the transferee for the grant of the option by the transferee, and

(ii) if any rights under the option were exercised (in whole or in part), is the amount (if any) so paid less so much of it as is referrable, on a just and reasonable basis, to the rights which have been so exercised.]

(5) In this paragraph “option” has the same meaning as in paragraph 12, apart from sub-paragraph (10).

(6) 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 (c. 8) (disregarding section 88 of that Act).

Textual Amendments

F115 Words in Sch. 26 para. 26(1)(a) substituted (with effect in accordance with Sch. 5 para. 19(6) to the amending Act) by Finance Act 2007 (c. 11), Sch. 5 para. 19(2)

F116 Words in Sch. 26 para. 26(2)(a) substituted (with effect in accordance with Sch. 5 para. 19(6) to the amending Act) by Finance Act 2007 (c. 11), Sch. 5 para. 19(3)(a)

F117 Words in Sch. 26 para. 26(2)(b) substituted (with effect in accordance with Sch. 5 para. 19(6) to the amending Act) by Finance Act 2007 (c. 11), Sch. 5 para. 19(3)(b)

F118 Words in Sch. 26 para. 26(3) substituted (with effect in accordance with Sch. 5 para. 19(6) to the amending Act) by Finance Act 2007 (c. 11), Sch. 5 para. 19(4)

F119 Words in Sch. 26 para. 26(4)(a) inserted (with effect in accordance with Sch. 5 para. 19(6) to the amending Act) by Finance Act 2007 (c. 11), Sch. 5 para. 19(5)(a)

F120 Sch. 26 para. 26(4)(b) substituted (with effect in accordance with Sch. 5 para. 19(6) to the amending Act) by Finance Act 2007 (c. 11), Sch. 5 para. 19(5)(b)

Exchange gains and losses where derivative contracts not on arm’s length terms U.K.

27 (1) Sub-paragraph (2) applies where—

(a) a company is party to a derivative contract in an accounting period,

(b) as regards the derivative contract, an exchange gain or exchange loss arises to the company for the accounting period in question, and

(c) the profits and losses of the company fall by virtue of Schedule 28AA to the Taxes Act 1988 (provision not at arm’s length) to be computed for tax purposes as if the company were not party to the derivative contract.

(2) Where this sub-paragraph applies, any exchange gains and losses which arise to the company from the derivative contract for the accounting period in question shall be left out of account in determining the credits and debits which are, in the case of the company, to be brought into account for the purposes of this Schedule.

(3) Sub-paragraph (4) applies where—

(a) a company is party to a derivative contract in an accounting period,

(b) as regards the derivative contract, an exchange gain or exchange loss arises to the company for the accounting period in question, and

(c) the profits and losses of the company fall by virtue of Schedule 28AA to the Taxes Act 1988 to be computed for tax purposes as if the terms of the derivative contract were those that would have been agreed by the company and the other party to the derivative contract had they been dealing at arm’s length.

(4) Where this sub-paragraph applies, the credits and debits which are, in the case of the company, to be brought into account for the purposes of this Schedule shall be determined on the assumption that, in the accounting period in question, the amount of any exchange gain or loss arising to the company from the derivative contract is the adjusted amount.

(5) In sub-paragraph (4) the “adjusted amount” is the amount of an exchange gain or loss (including an exchange gain of nil) which would have arisen from the derivative contract if the terms of the contract were those that would have been agreed by the company and the other party to the derivative contract had they been dealing at arm’s length.

Transactions within groups U.K.

28 (1) This paragraph applies where, as a result of any transaction or series of transactions falling within sub-paragraph (2), one of the companies there referred to (“the transferee company”) directly or indirectly replaces the other (“the transferor company”) as a party to a derivative contract.

(2) The transactions or series of transactions referred to in sub-paragraph (1) are—

(a) a related transaction between two companies that are—

(i) members of the same group, and

(ii) within the charge to corporation tax in respect of that transaction;

(b) a series of transactions having the same effect as a related transaction between two companies each of which—

(i) has been a member of the same group at any time in the course of that series of transactions, and

(ii) is within the charge to corporation tax in respect of the related transaction;

(c) a transfer between two companies of business consisting of the effecting or carrying out of contracts of long-term insurance which has effect under an insurance business transfer scheme; and

(d) any transfer between two companies which is a qualifying overseas transfer within the meaning [F121 given by the definition treated as inserted into section 431(2) of the Taxes Act 1988 by paragraph 6(9) of Schedule 19AC to that Act] (transfer of business of overseas life insurance company).

[F122 (3) For the purpose of determining the credits and debits to be brought into account for the purposes of this Schedule in respect of the derivative contract—

(a) for the accounting period in which the transaction or, as the case may be, the first of the series of transactions takes place, the transferor company shall be treated as having entered into that transaction for a consideration equal to the notional carrying value of the contract; and

(b) for any accounting period in which it is a party to the contract, the transferee company shall be treated as if it had acquired the contract for a consideration equal to its notional carrying value.

For the purposes of this sub-paragraph the notional carrying value is the amount that would have been the carrying value of the derivative contract in the accounts of the transferor company if a period of account had ended immediately before the date when the company ceased to be party to the contract.]

[F123 (3ZA) In any case where a discount (within the meaning given by section 100(3A) of the Finance Act 1996) arises in respect of the transaction or the series of transactions, the consideration for the purposes of sub-paragraph (3)(a) is to be increased by the amount of the discount.]

[F124 (3A) Where the debits or credits to be brought into account for the purposes of this Schedule in respect of any amounts fall to be determined in accordance with sub-paragraph (3), Schedule 28AA to the Taxes Act 1988 (provision not at arm’s length) does not apply in relation to those amounts.]

[F125 (4) References in this paragraph to one company replacing another as party to a derivative contract shall include references to a company becoming party to any derivative contract which—

(a) confers rights or imposes liabilities, or

(b) both confers rights and imposes liabilities,

where those rights or liabilities, or rights and liabilities, are equivalent to those of the other company under a derivative contract to which that other company has previously ceased to be party.]

F126 (5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(6) In this paragraph references to companies being members of the same group of companies shall be construed in accordance with section 170 of the Taxation of Chargeable Gains Act 1992 (c. 12).

(7) This paragraph has effect subject to paragraphs 29 and 30.

Textual Amendments

F121 Words in Sch. 26 para. 28(2)(d) substituted (with effect in accordance with reg. 1 of the amending S.I.) by The Overseas Life Insurance Companies Regulations 2004 (S.I. 2004/2200), regs. 1(1), 11(4)

F122 Sch. 26 para. 28(3) substituted (with effect in accordance with Sch. 7 para. 22(4)-(6) of the amending Act) by Finance (No. 2) Act 2005 (c. 22), Sch. 7 para. 22(2)

F123 Sch. 26 para. 28(3ZA) inserted (with effect in accordance with Sch. 6 para. 22(3)(4) of the amending Act) by Finance Act 2006 (c. 25), Sch. 6 para. 22(2)

F124 Sch. 26 para. 28(3A) inserted (with effect in accordance with s. 37 of the amending Act) by Finance Act 2004 (c. 12), Sch. 5 para. 15

F125 Sch. 26 para. 28(4) substituted (with effect in accordance with s. 179(5) of the amending Act) by Finance Act 2003 (c. 14), s. 179(3)

F126 Sch. 26 para. 28(5) repealed (with effect in accordance with Sch. 9 para. 17(1) to the amending Act) by Finance Act 2007 (c. 11), Sch. 9 para. 1(2)(g), Sch. 27 Pt. 2(9)

Modifications etc. (not altering text)

C14 Sch. 26 para. 28 modified by S.I. 1997/473, reg. 53G (as inserted (30.1.2003) by The Friendly Societies (Modification of the Corporation Tax Acts) (Amendment) Regulations 2003 (S.I. 2003/23), regs. 1(1), 10)

C15 Sch. 26 para. 28 excluded (with effect in accordance with reg. 1(2) of the amending S.I.) by The Taxation of Securitisation Companies Regulations 2006 (S.I. 2006/3296), regs. 1(1), 20

Transactions within groups: exceptions relating to insurance U.K.

29 (1) Paragraph 28 does not apply by virtue of sub-paragraph 2(a) or (b) of that paragraph in relation to any transfer of an asset, or of any rights or duties under or interest in an asset, where the asset was within one of the categories set out in section [F127 440(4)(a), (d) and (e)] of the Taxes Act 1988 (assets held for certain categories of long term business) either immediately before the transfer or immediately afterwards.

(2) Paragraph 28 does not apply by virtue of sub-paragraph 2(c) or (d) of that paragraph in relation to any transfer of an asset, or of any rights or duties under or interest in an asset, where the asset—

(a) was an asset within one of the categories set out in section 440(4) of the Taxes Act 1988 immediately before the transfer, and

(b) is not an asset within that category immediately afterwards.

(3) For the purposes of sub-paragraph (2) above, where one of the companies is an overseas life insurance company an asset shall be taken to be within the same category both immediately before the transfer and immediately afterwards if it—

(a) was an asset within one category immediately before the transfer, and

(b) is an asset within the corresponding category immediately afterwards.

(4) In this paragraph “overseas life insurance company” has the same meaning as in Chapter 1 of Part 12 of the Taxes Act 1988.

Textual Amendments

F127 Words in Sch. 26 para. 29(1) substituted (with effect in accordance with s. 38(2) of the amending Act) by Finance Act 2007 (c. 11), Sch. 7 para. 75(3) (with Sch. 7 Pt. 2)

Modifications etc. (not altering text)

C16 Sch. 26 para. 29 modified by S.I. 2005/2014, reg. 44A (as inserted (with effect in accordance with reg. 1(2) of the amending S.I.) by The Friendly Societies (Modification of the Corporation Tax Acts) (Amendment) Regulations 2007 (S.I. 2007/2134), regs. 1(1), 34)

Transactions within groups: [F128 fair value accounting] U.K.

[F129 30 (1) Paragraph 28 does not apply where the transferor company uses [F130 fair value accounting] as respects the derivative contract in question, but in any such case—

(a) the amount to be brought into account by the transferor company in respect of the transaction referred to in that paragraph, or in respect of the series of transactions there referred to, taken together, must be the fair value of the derivative contract as at the date of transfer to the transferee company; and

[F131 (b) for any accounting period in which it is a party to the contract, the transferee company shall be treated for the purpose of determining the credits and debits to be brought into account for the purposes of this Schedule in respect of the contract as if it had acquired the contract for a consideration equal to the amount mentioned in paragraph (a) (but on the assumption that sub-paragraph (1A) is omitted).]

[F132 (1A) In any case where a discount (within the meaning given by section 100(3A) of the Finance Act 1996) arises in respect of the transaction or the series of transactions, the amount to be brought into account by virtue of sub-paragraph (1)(a) is to be increased by the amount of the discount.]

(2) In this paragraph “transferor company” and “transferee company” have the same meaning as in paragraph 28.]

Textual Amendments

F128 Words in Sch. 26 para. 30 heading substituted (with effect in accordance with s. 52(3) of the amending Act) by Finance Act 2004 (c. 12), Sch. 10 para. 57(a)

F129 Sch. 26 para. 30 substituted (with effect in accordance with s. 179(5) of the amending Act) by Finance Act 2003 (c. 14), s. 179(4)

F130 Words in Sch. 26 para. 30(1) substituted (with effect in accordance with s. 52(3) of the amending Act) by Finance Act 2004 (c. 12), Sch. 10 para. 57(b)

F131 Sch. 26 para. 30(1)(b) substituted (with effect in accordance with Sch. 6 para. 23(4)(5) of the amending Act) by Finance Act 2006 (c. 25), Sch. 6 para. 23(2)

F132 Sch. 26 para. 30(1A) inserted (with effect in accordance with Sch. 6 para. 23(4)(5) of the amending Act) by Finance Act 2006 (c. 25), Sch. 6 para. 23(3)

Transferee leaving group after replacing transferor as party to derivative contract U.K.

[F133 30A (1) This paragraph applies in any case where—

(a) paragraph 28 applies—

(i) by virtue of sub-paragraph (2)(a) of that paragraph (“case A”), or

(ii) by virtue of sub-paragraph (2)(b) of that paragraph (“case B”), but

(b) before the end of the relevant 6 year period, the transferee company ceases to be a member of the relevant group.

(2) In any such case, this Schedule shall have effect as if the transferee company had—

(a) immediately before that cessation, assigned its rights and liabilities under the relevant derivative contract for a consideration of an amount equal to their fair value at that time, and

(b) immediately reacquired them for a consideration of the same amount,

but only if Condition 1 or 2 is satisfied and sub-paragraph (5) does not apply.

(3) Condition 1 is that if sub-paragraph (2) has effect, a credit would in consequence of paragraph (a) of that sub-paragraph fall to be brought into account for the purposes of this Schedule by the transferee company.

(4) Condition 2 is that—

(a) Condition 1 is not satisfied,

(b) the company has a hedging relationship between the relevant derivative contract and a creditor relationship, and

(c) in consequence of paragraph 12A(2)(a) of Schedule 9 to the Finance Act 1996, a credit falls to be brought into account by the transferee company for the purposes of Chapter 2 of Part 4 of the Finance Act 1996 in respect of the creditor relationship.

(5) Where the transferee company ceases to be a member of the relevant group by reason only of an exempt distribution (see sub-paragraph (8))—

(a) sub-paragraph (2) does not have effect, but

(b) if there is chargeable payment within 5 years after the making of the exempt distribution, sub-paragraph (6) applies.

[F134 (5A) Where rights and liabilities under a derivative contract are transferred as part of the process of a transfer to which paragraph 30B or 30D applies, and in consequence of the transfer the transferee company ceases to be a member of a group (“Group 1”)—

(a) the transferee shall not be treated for the purposes of this paragraph as having left Group 1, and

(b) if in consequence of the transfer the transferee becomes a member of another group (“Group 2”) it shall be treated, for the purposes of this paragraph, as if Group 1 and Group 2 were the same.]

(6) Where this sub-paragraph applies, this Chapter shall have effect as if—

(a) the transferee company had, immediately before the making of the chargeable payment, assigned its rights and liabilities under the relevant derivative contract,

(b) the assignment had been for a consideration of an amount equal to the fair value of those rights and liabilities immediately before the transferee company ceased to be a member of the relevant group, and

(c) the transferee company had immediately reacquired those rights and liabilities for a consideration of the same amount,

but only if Condition 1 or 2, as modified by sub-paragraph (7), is satisfied.

(7) The modifications are that—

(a) in Condition 1, the references to sub-paragraph (2), and paragraph (a) of that sub-paragraph, are to be taken respectively as references to sub-paragraph (6) and paragraphs (a) and (b) of that sub-paragraph, and

(b) in Condition 2, the reference to paragraph 12A(2)(a) of Schedule 9 to the Finance Act 1996 is to be taken as a reference to paragraph 12A(6)(a) and (b) of that Schedule.

(8) In this paragraph—

• “assignment”, in relation to Scotland, means an assignation;

• “chargeable payment” has the meaning given by section 214(2) of the Taxes Act 1988;

• “exempt distribution” means a distribution which is exempt by virtue of section 213(2) [F135 or 213A] of the Taxes Act 1988;

• “creditor relationship” has the same meaning as in Chapter 2 of Part 4 of the Finance Act 1996 (see section 103(1) of that Act);

• “the relevant 6 year period” means the period of 6 years following—

  (a)

  in case A, the transaction mentioned in paragraph 28(2)(a), or

  (b)

  in case B, the last of the series of transactions mentioned in paragraph 28(2)(b);

• “the relevant derivative contract” means the derivative contract mentioned in paragraph 28(1);

• “the relevant group” means—

  (a)

  in case A, the group mentioned in paragraph 28(2)(a), or

  (b)

  in case B, the group mentioned in paragraph 28(2)(b);

• “the transferee company” means the company referred to as such in paragraph 28(1).]

Textual Amendments

F133 Sch. 26 para. 30A and cross-heading inserted (with effect in accordance with Sch. 7 para. 24(2) of the amending Act) by Finance (No. 2) Act 2005 (c. 22), Sch. 7 para. 24(1)

F134 Sch. 26 para. 30A(5A) inserted (with effect in accordance with reg. 3(1) of the amending S.I.) by The Corporation Tax (Implementation of the Mergers Directive) Regulations 2007 (S.I. 2007/3186), reg. 1(2), Sch. 1 para. 20(2)

F135 Words in Sch. 26 para. 30A(8) inserted (with effect in accordance with reg. 3(1) of the amending S.I.) by The Corporation Tax (Implementation of the Mergers Directive) Regulations 2007 (S.I. 2007/3186), reg. 1(2), Sch. 1 para. 20(3)

[F136 European cross-border merger U.K.

Textual Amendments

F136 Sch. 26 paras. 30B, 30C substituted for Sch. 26 para. 30B (with effect in accordance with reg. 3(2) of the amending S.I.) by The Corporation Tax (Implementation of the Mergers Directive) Regulations 2007 (S.I. 2007/3186), reg. 1(2), Sch. 2 para. 10

30B (1) This paragraph applies on a merger which satisfies the conditions specified in sub-paragraph (2), where— U.K.

(a) an SE is formed by the merger of two or more companies in accordance with Articles 2(1) and 17(2)(a) or (b) of Council Regulation (EC) 2157/2001 on the Statute for a European Company (Societas Europaea),

(b) an SCE is formed by the merger of two or more cooperative societies, at least one of which is a society registered under the Industrial and Provident Societies Act 1965, in accordance with Articles 2(1) and 19 of Council Regulation (EC) 1435/ 2003 on the Statute for a European Cooperative Society (SCE),

(c) the merger is effected by the transfer by one or more companies of all their assets and liabilities to a single existing company, or

(d) the merger is effected by the transfer by two or more companies of all their assets and liabilities to a single new company (other than an SE or an SCE) in exchange for the issue by the transferee, to each person holding shares in or debentures of a transferor, of shares or debentures.

(2) The conditions mentioned in sub-paragraph (1) are that—

(a) each of the merging companies is resident in a member State,

(b) the merging companies are not all resident in the same State,

(c) either—

(i) immediately after the merger the transferee is resident in the United Kingdom and within the charge to corporation tax in accordance with section 6 of the Taxes Act 1988, or

(ii) immediately after the merger the transferee is not resident in the United Kingdom but is within the charge to corporation tax in accordance with section 11 of the Taxes Act 1988, and

(d) in the case of a merger to which sub-paragraph (1)(a), (b) or (c) applies, either—

(i) the transfer of assets and liabilities is made in exchange for the issue by the transferee, to each person holding shares in or debentures of a transferor, of shares or debentures, or

(ii) sub-paragraph (i) is not satisfied in relation to the transfer by reason only, and to the extent only, that the transferee is prevented from complying with that sub-paragraph by section 658 of the Companies Act 2006 (rule against limited company acquiring own shares) or a corresponding provision of the law of another member State preventing the issue of shares or debentures to itself.

(3) Where this paragraph applies, in determining credits and debits to be brought into account for the purposes of this Chapter in respect of a derivative contract, if the rights and liabilities under the derivative contract are transferred in the course of the merger, the transferor and the transferee companies shall be treated as having entered into the transfer for a consideration equal to the notional carrying value (within the meaning given by paragraph 28(3)) of the derivative contract.

(4) Paragraph 30 shall apply, with any necessary modifications, in relation to this paragraph as in relation to paragraph 28.

(5) If sub-paragraph (2)(d)(ii) applies in relation to a transfer of assets and liabilities on a merger (in whole or in part) sections 24 and 122 of the Taxation of Chargeable Gains Act 1992 do not apply.

(6) Sub-paragraph (3) shall apply in relation to a merger only if—

(a) it is effected for bona fide commercial reasons, and

(b) it does not form part of a scheme or arrangements of which the main purpose, or one of the main purposes, is avoiding liability to corporation tax, capital gains tax or income tax.

(7) But sub-paragraph (6) shall not have the effect of preventing sub-paragraph (3) from applying if before the merger the Commissioners for Her Majesty's Revenue and Customs have on the application of any of the merging companies notified them that the Commissioners are satisfied that sub-paragraph (6) will not have that effect.

(8) Section 138(2) to (5) of the Taxation of Chargeable Gains Act 1992 shall have the same effect in relation to sub-paragraph (6) above as in relation to section 138(1).

(9) For the purposes of this paragraph—

(a) “cooperative society” means a society registered under the Industrial and Provident Societies Act 1965 or a similar society governed by the law of a member State other than the United Kingdom,

(b) “transferor” means—

(i) in relation to a merger to which sub-paragraph (1)(a) applies, each company merging to form the SE,

(ii) in relation to a merger to which sub-paragraph (1)(b) applies, each cooperative society merging to form the SCE, and

(iii) in relation to a merger to which sub-paragraph (1)(c) or (d) applies, each company transferring all of its assets and liabilities,

(c) “transferee” means—

(i) in relation to a merger to which sub-paragraph (1)(a) applies, the SE,

(ii) in relation to a merger to which sub-paragraph (1)(b) applies, the SCE, and

(iii) in relation to a merger to which sub-paragraph (1)(c) or (d) applies, the company to which assets and liabilities are transferred, and

(d) references, other than references in sub-paragraph (1)(a), (b) or (d), to a company include references to a cooperative society.]

[F136 30C (1) This paragraph applies on a merger which satisfies the conditions specified in sub-paragraph (2), where— U.K.

(a) an SE is formed by the merger of two or more companies in accordance with Articles 2(1) and 17(2)(a) or (b) of Council Regulation (EC) 2157/2001 on the Statute for a European Company (Societas Europaea),

(b) an SCE is formed by the merger of two or more cooperative societies, at least one of which is a society registered under the Industrial and Provident Societies Act 1965, in accordance with Articles 2(1) and 19 of Council Regulation (EC) 1435/ 2003 on the Statute for a European Cooperative Society (SCE),

(c) the merger is effected by the transfer by one or more companies of all their assets and liabilities to a single existing company, or

(d) the merger is effected by the transfer by two or more companies of all their assets and liabilities to a single new company (other than an SE or an SCE) in exchange for the issue by the transferee, to each person holding shares in or debentures of a transferor, of shares or debentures.

(2) The conditions mentioned in sub-paragraph (1) are that—

(a) each merging company is resident in a member State,

(b) the merging companies are not all resident in the same State,

(c) in the course of the merger a company resident in the United Kingdom (“company A”) transfers to a company resident in another member State (“company B”) all assets and liabilities relating to a business which company A carried on in a member State other than the United Kingdom through a permanent establishment,

(d) the transfer mentioned in paragraph (c) includes the transfer of rights and liabilities under a derivative contract, and

(e) in the case of a merger to which sub-paragraph (1)(a), (b) or (c) applies, either—

(i) the transfer of assets and liabilities is made in exchange for the issue by the transferee, to each person holding shares in or debentures of a transferor, of shares or debentures, or

(ii) sub-paragraph (i) is not satisfied in relation to the transfer by reason only, and to the extent only, that the transferee is prevented from complying with that sub-paragraph by section 658 of the Companies Act 2006 (rule against limited company acquiring own shares) or a corresponding provision of the law of another member State preventing the issue of shares or debentures to itself.

(3) Where tax would have been chargeable under the law of one or more other member States in respect of the transfer of rights and liabilities under the derivative contract but for the Mergers Directive, Part 18 of the Taxes Act (double taxation relief) including any arrangements having effect by virtue of section 788 of that Act (bilateral relief) shall apply as if that tax had been chargeable.

(4) In calculating tax notionally chargeable under sub-paragraph (3) it shall be assumed—

(a) that to the extent permitted by the law of the other member State losses arising on the transfer are set against gains arising on the transfer, and

(b) that any relief due to Company A under that law is claimed.

(5) Sub-paragraphs (6) to (9) of paragraph 30B apply for the purposes of this paragraph as they apply for the purposes of that paragraph.]

[F137 Cross-border transfer of business within European Community U.K.

Textual Amendments

F137 Sch. 26 paras. 30D-30F and cross-heading inserted (with effect in accordance with reg. 3(1) of the amending S.I.) by The Corporation Tax (Implementation of the Mergers Directive) Regulations 2007 (S.I. 2007/3186), reg. 1(2), Sch. 1 para. 19

30D (1) This paragraph applies where— U.K.

(a) a company resident in one member State transfers to a company resident in another member State the whole or part of a business carried on in the United Kingdom,

(b) the transfer is wholly in exchange for shares or debentures issued by the transferee to the transferor,

(c) the transferor and the transferee each make a claim under this paragraph, and

(d) either—

(i) the transferee is resident in the United Kingdom immediately after the transfer, or

(ii) the transferee is within the charge to corporation tax immediately after the transfer in accordance with section 11 of the Taxes Act 1988.

(2) This paragraph also applies where a company transfers part of its business to one or more companies if—

(a) the transferor is resident in one member State,

(b) the part of the transferor's business which is to be transferred is carried on by the transferor in the United Kingdom,

(c) at least one transferee is resident in a member State other than that in which the transferor is resident (and each transferee is resident in a member State, but not necessarily the same one),

(d) the transferor continues to carry on a business after the transfer,

(e) the conditions in sub-paragraph (1)(c) and (d) are satisfied (for which purpose references to the transferee shall be treated as references to each of the transferees), and

(f) either of the following conditions is satisfied.

(3) Condition 1 is that the transfer is made in exchange for the issue of shares in or debentures of each transferee company to the persons holding shares in or debentures of the transferor.

(4) Condition 2 is that the transfer is not made in exchange for the issue of shares in or debentures of each transferee by reason only, and to the extent only, that a transferee is prevented from complying with Condition 1 by section 658 of the Companies Act 2006 (rule against limited company acquiring own shares) or by a corresponding provision of the law of another member State preventing the issue of shares or debentures to itself.

(5) If Condition 2 applies in relation to the whole or part of a transfer, sections 24 and 122 of the Taxation of Chargeable Gains Act 1992 do not apply in relation to the transfer.

(6) Where this paragraph applies, in determining credits and debits to be brought into account for the purposes of this Chapter in respect of a derivative contract, if the rights and liabilities under the derivative contract are transferred in the course of the transfer of the business or part mentioned in sub-paragraph (1) or (2), the transferor and the transferee companies shall be treated as having entered into the transfer for a consideration equal to the notional carrying value (within the meaning given by paragraph 28(3)) of the derivative contract.

(7) Paragraph 30 shall have effect (with any necessary modifications) in relation to this paragraph as it has effect in relation to paragraph 28.

30E (1) This paragraph applies where— U.K.

(a) a company resident in the United Kingdom transfers to a company resident in another member State the whole or part of a business which immediately before the transfer the transferor carried on in a member State other than the United Kingdom through a permanent establishment,

(b) the transfer is wholly or partly in exchange for shares or debentures issued by the transferee to the transferor or to the persons holding shares in or debentures of the transferor,

(c) the transfer includes the transfer of rights or liabilities under a derivative contract, and

(d) the transferor makes a claim under this paragraph.

(2) This paragraph also applies where a company resident in the United Kingdom transfers part of its business to one or more companies if—

(a) the part of the transferor's business which is to be transferred was carried on immediately before the transfer in a member State other than the United Kingdom through a permanent establishment,

(b) at least one transferee is resident in a member State other than the United Kingdom (and each transferee is resident in a member State, but not necessarily the same one),

(c) the transferor continues to carry on a business,

(d) the conditions in sub-paragraph (1)(c) and (d) are satisfied, and

(e) either of the following conditions is satisfied.

(3) Condition 1 is that the transfer is made in exchange for the issue of shares in or debentures of each transferee company to the persons holding shares in or debentures of the transferor.

(4) Condition 2 is that the transfer is not made in exchange for the issue of shares in or debentures of each transferee by reason only, and to the extent only, that a transferee is prevented from complying with Condition 1 by section 658 of the Companies Act 2006 (rule against limited company acquiring own shares) or by a corresponding provision of the law of another member State preventing the issue of shares or debentures to itself.

(5) Where tax would have been chargeable under the law of one or more other member States in respect of the transfer of rights and liabilities under the derivative contract but for the Mergers Directive, Part 18 of the Taxes Act 1988 (double taxation relief) including any arrangements having effect by virtue of section 788 of that Act (bilateral relief) shall apply as if that tax had been chargeable.

(6) In calculating tax notionally chargeable under sub-paragraph (5) it shall be assumed—

(a) that to the extent permitted by the law of the other member State losses arising on the transfer are set against gains arising on the transfer, and

(b) that any relief due to the transferor under that law is claimed.

30F (1) Paragraph 30D or 30E shall apply in relation to the transfer of the whole or part of a business only if— U.K.

(a) it is effected for bona fide commercial reasons, and

(b) it does not form part of a scheme or arrangements of which the main purpose, or one of the main purposes, is avoiding liability to income tax, corporation tax or capital gains tax.

(2) But sub-paragraph (1) shall not prevent paragraph 30D or 30E from applying in relation to a transfer if before the transfer the Commissioners for Her Majesty's Revenue and Customs have on the application of the transferor and transferee or transferees notified them that the Commissioners are satisfied that sub-paragraph (1) will not prevent paragraph 30D or 30E from applying in relation to the transfer.

(3) Section 138(2) to (5) of the TCGA 1992 shall have the same effect in relation to sub-paragraph (2) above as in relation to section 138(1).]

[F138 Transparent entities U.K.

Textual Amendments

F138 Sch. 26 paras. 30G-30I and cross-heading inserted (with effect in accordance with reg. 3(3) of the amending S.I.) by The Corporation Tax (Implementation of the Mergers Directive) Regulations 2007 (S.I. 2007/3186), reg. 1(2), Sch. 3 para. 4

30G (1) This paragraph applies in relation to a transfer of a business, or a part of a business, where— U.K.

(a) the transfer is of a kind to which paragraph 30D(1) or (2) applies (or to which either of those provisions would apply if the business, or the part of the business, transferred were carried on by the transferor in the United Kingdom and one of the conditions mentioned in paragraph 30D(1)d) were satisfied in relation to the transferee, or each of the transferees), and

(b) the transferor is a transparent entity.

(2) Where this paragraph applies paragraph 30D(3) does not apply in relation to the transfer.

(3) If, as a result of a transfer to which this paragraph applies, a transfer profit would, but for the Mergers Directive, have been chargeable to tax under the law of a member State other than the United Kingdom, Part 18 of the Taxes Act 1988 (double taxation relief), including any arrangements having effect by virtue of section 788 of that Act (bilateral relief), shall apply as if that tax, calculated in accordance with sub-paragraph (5), had been chargeable.

(4) In sub-paragraph (3) “transfer profit” means a profit accruing to a transparent entity in respect of a derivative contract (or which would be treated as accruing to that entity were it not transparent) by reason of the transfer of assets by the transparent entity to the transferee.

(5) Tax is calculated in accordance with this sub-paragraph if—

(a) so far as permitted under the law of the relevant member State, losses arising on the transfer are set against profits arising on the transfer, and

(b) any relief available under that law has been claimed.

30H (1) This paragraph applies in relation to a merger if— U.K.

(a) the merger is of a kind to which paragraph 30B(1) applies,

(b) the conditions in paragraph 30B(2) are satisfied in relation to the merger, and

(c) one or more of the merging companies is a transparent entity.

(2) Where this paragraph applies, if the assets and liabilities of a transparent entity are transferred to another company by reason of the merger, paragraph 30B(3) shall not apply.

(3) If, as a result of a merger in relation to which this paragraph applies, a merger profit would, but for the Mergers Directive, have been chargeable to tax under the law of a member State other than the United Kingdom, Part 18 of the Taxes Act 1988 (double taxation relief), including any arrangements having effect by virtue of section 788 of that Act (bilateral relief), shall apply as if that tax, calculated in accordance with sub-paragraph (5), had been chargeable.

(4) In sub-paragraph (3) “merger profit” means a profit in respect of a derivative contract accruing to a transparent entity (or which would be treated as accruing to that entity were it not transparent) by reason of the transfer of assets by the transparent entity to another company on the merger.

(5) Tax is calculated in accordance with this sub-paragraph if—

(a) so far as is permitted under the law of the relevant member State, losses arising on the transfer are set against profits arising on the transfer, and

(b) any relief available under that law has been claimed.

30I (1) In paragraphs 30A to 30H, unless the contrary intention appears— U.K.

(a) “the Mergers Directive” means Council Directive 90/434/ EEC of 23rd July 1990 on mergers, transfers &c.,

(b) “company” (except in paragraph 30B) means an entity listed as a company in the Annex to the Mergers Directive, and

(c) “transparent entity” means an entity which is resident in a member State other than the United Kingdom and is listed as a company in the Annex to the Mergers Directive, but which does not have an ordinary share capital (within the meaning given by section 832 of the Taxes Act).

(2) For the purposes of those paragraphs and sub-paragraph (1) above, a company is resident in a member State if—

(a) it is within a charge to tax under the law of the State as being resident for that purpose, and

(b) it is not regarded, for the purpose of any double taxation relief arrangements to which the State is a party, as resident in a territory not within a member State.]

Derivative contracts with non-residents U.K.

[F136 31 (1) This paragraph applies in relation to a company where, as a result of any transaction,—

(a) the company and a non-resident both become party to a derivative contract,

(b) the company becomes party to a derivative contract to which a non-resident is party, or

(c) a non-resident becomes party to a derivative contract to which the company is party.

(2) For each accounting period for any part of which the company and the non-resident are both party to a derivative contract, the credits and debits which fall, in the case of the company, to be brought into account for the purposes of this Schedule as respects the derivative contract shall not include, in a case where that contract makes provision for notional interest payments, any relevant debit arising in relation to that contract.

(3) For the purposes of sub-paragraph (2) the amount of a relevant debit shall be computed by determining, as regards that accounting period, the amount (if any) by which—

(a) the aggregate of any notional interest payments made by the company to the non-resident while the company and the non-resident are both party to the derivative contract, exceeds

(b) the aggregate of any notional interest payments made by the non-resident to the company during that time.

(4) For the purposes of sub-paragraphs (2) and (3) a notional interest payment is any payment the amount of which falls to be determined (wholly or mainly) by applying to a notional principal amount specified in a derivative contract, for a period so specified, a rate the value of which at all times is the same as that of a rate of interest so specified.

(5) Sub-paragraph (2) shall not apply where the company is a bank, building society, financial trader or recognised clearing house and—

(a) the company is party to the derivative contract solely for the purposes of a trade or part of a trade carried on by it in the United Kingdom, and

(b) it is party to the derivative contract otherwise than as agent or nominee of another person.

(6) Sub-paragraph (2) shall not apply where—

(a) the non-resident is party to the derivative contract solely for the purposes of a trade or part of a trade carried on by him in the United Kingdom through a branch or agency, and

(b) he is party to the derivative contract otherwise than as agent or nominee of another person.

(7) Sub-paragraph (2) shall not apply where arrangements made in relation to the territory in which the non-resident is resident—

(a) have effect by virtue of section 788 of the Taxes Act 1988, and

(b) make provision, whether for relief or otherwise, in relation to interest (as defined in the arrangements).

(8) Where the non-resident is party to the contract as agent or nominee of another person, sub-paragraph (7) shall have effect as if the reference to the territory in which the non-resident is resident were a reference to the territory in which that other person is resident.

(9) In this paragraph—

• “non-resident” means a person who is not resident in the United Kingdom;

• “recognised clearing house” has the meaning given by section 285 of the Financial Services and Markets Act 2000 (c. 8).

Textual Amendments

F136 Sch. 26 paras. 30B, 30C substituted for Sch. 26 para. 30B (with effect in accordance with reg. 3(2) of the amending S.I.) by The Corporation Tax (Implementation of the Mergers Directive) Regulations 2007 (S.I. 2007/3186), reg. 1(2), Sch. 2 para. 10

Modifications etc. (not altering text)

C17 Sch. 26 para. 31(6)(a) modified (with effect in accordance with s. 153(4) of the amending Act) by Finance Act 2003 (c. 14), s. 153(2)(d)

Amounts imputed under Schedule 28AA to the Taxes Act 1988 U.K.

[F139 31A (1) This paragraph applies where, in pursuance of Schedule 28AA to the Taxes Act 1988 (provision not at arm’s length), an amount falls to be treated as any of the following—

(a) an amount of profits or losses (disregarding any charges or expenses) arising to a company from any of its derivative contracts or related transactions;

(b) charges or expenses incurred by a company under or for the purposes of any of its derivative contracts or related transactions.

(2) That Schedule shall have effectF140 ... so as to require credits or debits relating to the amount so treated to be brought into account for the purposes of this Chapter to the same extent as they would be in the case of an actual amount of—

(a) profits or losses (disregarding any charges or expenses) arising to the company from the derivative contract or related transaction, or

(b) charges or expenses incurred under or for the purposes of the derivative contract or related transaction,

as the case may be.]]

Textual Amendments

F136 Sch. 26 paras. 30B, 30C substituted for Sch. 26 para. 30B (with effect in accordance with reg. 3(2) of the amending S.I.) by The Corporation Tax (Implementation of the Mergers Directive) Regulations 2007 (S.I. 2007/3186), reg. 1(2), Sch. 2 para. 10

F139 Sch. 26 para. 31A inserted (with effect in accordance with s. 37 of the amending Act) by Finance Act 2004 (c. 12), Sch. 5 para. 15(3)

F140 Words in Sch. 26 para. 31A(2) repealed (with effect in accordance with s. 52(3) of the amending Act) by Finance Act 2004 (c. 12), Sch. 10 para. 58, Sch. 42 Pt. 2(6)

Part 7 U.K. Collective investment schemes

Authorised unit trusts: capital profits and losses U.K.

32 [F141 (1) Where any profits or losses arising to an authorised unit trust from a derivative contract in an accounting period are capital profits or losses, they must not be brought into account as credits or debits for the purposes of this ScheduleF142 ....

[F143 (1A) For the purposes of this paragraph “capital profits, gains or losses”—

(a) in the case of an authorised unit trust that prepares accounts in accordance with UK generally accepted accounting practice, has the meaning given by sub-paragraphs (2) to (4), and

(b) in the case of an authorised unit trust that prepares accounts in accordance with international accounting standards, has the meaning given by order made by the Treasury.]

(2) [F144 In the cases mentioned in sub-paragraph (1A)(a)], capital profits and losses arising from a derivative contract in an accounting period are such profits and losses arising from a derivative contract as fall to be dealt with under—

(a) the heading “net gains/losses on investments during the period”, or

(b) the heading “other gains/losses”,

in the statement of total return for the accounting period.

(3) For the purposes of sub-paragraph (2), the statement of total return for an accounting period is the statement of total return which, in accordance with the Statement of Recommended Practice used for the accounting period, must be included in the accounts contained in the annual report of the authorised unit trust which deals with the accounting period.

(4) For the purposes of sub-paragraph (3), the “Statement of Recommended Practice” used for an accounting period is—

(a) in relation to any accounting period for which it is required or permitted to be used, the Statement of Recommended Practice relating to Authorised Unit Trust Schemes issued by the Investment Management Regulatory Organisation Limited in January 1997, as from time to time modified, amended or revised, or

(b) in relation to any accounting period for which it is required or permitted to be used, any subsequent statement of recommended practice dealing with accounting requirements relating to authorised unit trust schemes, as from time to time modified, amended or revised.]

Textual Amendments

F141 Sch. 26 para. 32 repealed (for the purposes of corporation tax and income tax, with effect as specifed in art. 2(2)(3) of the commencing S.I.) by Finance (No. 2) Act 2005 (c. 22), ss. 17(1)(c), 19(1), Sch. 11 Pt. 2(3); S.I. 2006/982, art. 2

F142 Words in Sch. 26 para. 32(1) repealed (with effect in accordance with s. 52(3) of the amending Act) by Finance Act 2004 (c. 12), Sch. 10 para. 59(2), Sch. 42 Pt. 2(6)

F143 Sch. 26 para. 32(1A) inserted (with effect in accordance with s. 52(3) of the amending Act) by Finance Act 2004 (c. 12), Sch. 10 para. 59(3)

F144 Words in Sch. 26 para. 32(2) substituted (with effect in accordance with s. 52(3) of the amending Act) by Finance Act 2004 (c. 12), Sch. 10 para. 59(4)

Open-ended investment companies: capital profits and losses U.K.

33 [F145 (1) Where any profits or losses arising to an open-ended investment company from a derivative contract in an accounting period are capital profits or losses, they must not be brought into account as credits or debits for the purposes of this ScheduleF146 ....

[F147 (1A) For the purposes of this paragraph “capital profits, gains or losses”—

(a) in the case of an open-ended investment company that prepares accounts in accordance with UK generally accepted accounting practice, has the meaning given by sub-paragraphs (2) to (4), and

(b) in the case of an open-ended investment company that prepares accounts in accordance with international accounting standards, has the meaning given by order made by the Treasury.]

(2) [F148 In the cases mentioned in sub-paragraph (1A)(a)], capital profits and losses arising from a derivative contract in an accounting period are such profits and losses arising from a derivative contract as fall to be dealt with under—

(a) the heading “net gains/losses on investments during the period”, or

(b) the heading “other gains/losses”,

in the statement of total return for the accounting period.

(3) For the purposes of sub-paragraph (2), the statement of total return for an accounting period is the statement of total return which, in accordance with the Statement of Recommended Practice used for the accounting period, must be included in the accounts contained in the annual report of the open-ended investment company which deals with the accounting period.

(4) For the purposes of sub-paragraph (3), the “Statement of Recommended Practice” used for an accounting period is—

(a) in relation to any accounting period for which it is required or permitted to be used, the Statement of Recommended Practice relating to Open-Ended Investment Companies issued by the Financial Services Authority in November 2000, as from time to time modified, amended or revised, or

(b) in relation to any accounting period for which it is required or permitted to be used, any subsequent statement of recommended practice dealing with accounting requirements relating to open-ended investment companies F149 ..., as from time to time modified, amended or revised.]

Textual Amendments

F145 Sch. 26 para. 33 repealed (for the purposes of corporation tax and income tax, with effect as specifed in art. 2(2)(3) of the commencing S.I.) by Finance (No. 2) Act 2005 (c. 22), ss. 17(1)(c), 19(1), Sch. 11 Pt. 2(3); S.I. 2006/982, art. 2

F146 Words in Sch. 26 para. 33(1) repealed (with effect in accordance with s. 52(3) of the amending Act) by Finance Act 2004 (c. 12), Sch. 10 para. 60(2), Sch. 42 Pt. 2(6)

F147 Sch. 26 para. 33(1A) inserted (with effect in accordance with s. 52(3) of the amending Act) by Finance Act 2004 (c. 12), Sch. 10 para. 60(3)

F148 Words in Sch. 26 para. 33(2) substituted (with effect in accordance with s. 52(3) of the amending Act) by Finance Act 2004 (c. 12), Sch. 10 para. 60(4)

F149 Words in Sch. 26 para. 33(4)(b) repealed (with effect in accordance with Sch. 9 para. 5(2) of the amending Act) by Finance Act 2004 (c. 12), Sch. 9 para. 5(1), Sch. 42 Pt. 2(5)

Power to amend paragraphs 32 and 33 U.K.

34 (1) The Treasury may by order amend paragraph 32 or 33 or so as to alter the definition of capital profits or losses [F150 in paragraph 32(2) to (4) or 33(2) to (4)] in consequence of the modification, amendment, revision or replacement of a Statement of Recommended Practice.

(2) 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

F150 Words in Sch. 26 para. 34(1) inserted (with effect in accordance with s. 52(3) of the amending Act) by Finance Act 2004 (c. 12), Sch. 10 para. 61

Distributing offshore funds U.K.

F151 35 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Textual Amendments

F151 Sch. 26 para. 35 repealed (with effect in accordance with Sch. 26 para. 2(3)-(6) of the amending Act) by Finance Act 2004 (c. 12), Sch. 26 para. 2(2), Sch. 42 Pt. 2(18) (with Sch. 26 para. 17)

Modifications etc. (not altering text)

C18 Sch. 26 para. 35 saved by The Offshore Funds Regulations 2004 (S.I. 2004/2572), regs. 1(1)(2), 7(3)(b)

C19 Sch. 26 para. 35 saved by The Offshore Funds Regulations 2004 (S.I. 2004/2572), regs. 1(1)(2), 6(3)(b)

Contracts relating to holdings in unit trust schemes, open-ended investment companies and offshore funds U.K.

36 (1) This paragraph applies in relation to a relevant contract to which a company is party in an accounting period if—

(a) it is not a derivative contract for the purposes of this Schedule, and

(b) its underlying subject matter consists wholly or partly of a holding which is, in that period, a relevant holding.

[F152 (2) The Corporation Tax Acts have effect for that period (and any succeeding period in which the relevant contract is a relevant contract of the company) as if the relevant contract were a derivative contract.

(2A) The debits and credits to be brought into account for the purposes of this Schedule as respects the company’s relevant holdings must be determined on the basis of fair value accounting.]

(3) For the purposes of this paragraph a person holds a relevant holding in an accounting period if, at any time in that period, he holds—

(a) any rights under a unit trust scheme,

(b) any shares in an open-ended investment company, or

(c) any relevant interests in an offshore fund,

and there is a time in that period when that scheme, company or fund fails to satisfy the non-qualifying investments test.

(4) For the purposes of this paragraph—

(a) “a relevant interest in an offshore fund” has the same meaning as in paragraph 7 of Schedule 10 to the Finance Act 1996 (c. 8), and

(b) a unit trust scheme, open-ended investment company or offshore fund fails to satisfy the non-qualifying investments test if it fails to satisfy the test in paragraph 8 of that Schedule.

Textual Amendments

F152 Sch. 26 para. 36(2)(2A) substituted for Sch. 26 para. 36(2) (with effect in accordance with s. 52(3) of the amending Act) by Finance Act 2004 (c. 12), Sch. 10 para. 62

Contract which becomes contract to which paragraph 36 applies U.K.

37 (1) This paragraph applies if the conditions in sub-paragraphs (2) and (3) are satisfied in relation to any relevant contract of a company.

(2) The first condition is that—

(a) the company is party to the relevant contract in two successive accounting periods (“the first and second accounting periods”), and

(b) paragraph 36 applies in relation to that relevant contract for the second accounting period but not the first.

(3) The second condition is that the relevant contract was, immediately before the beginning of the second accounting period, a chargeable asset.

(4) Where an opening valuation of the relevant contract falls to be made at the beginning of the second accounting period (for the purposes of bringing an amount into account for that period on a mark to market basis of accounting), the value of that contract at that time shall be taken for the purpose of the opening valuation to be equal to whatever, in relation to a disposal immediately before the end of the first accounting period, would have been taken to be the market value of that contract for the purposes of the Taxation of Chargeable Gains Act 1992 (c. 12).

(5) When the company ceases to be a party to the relevant contract it shall bring into account, for the accounting period in which it ceased to be a party to that 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 the beginning of the second accounting period, and

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

(6) 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 Taxation of Chargeable Gains Act 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).

Investment trusts: capital profits, gains or losses U.K.

[F153 38 (1) Capital profits, gains or losses arising to an investment trust from a [F154 derivative contract] must not be brought into account as credits or debits for the purposes of this Schedule.

(2) For the purposes of this paragraph “capital profits, gains or losses”—

(a) in the case of an investment trust that prepares accounts in accordance with UK generally accepted accounting practice, has the meaning given by sub-paragraphs (3) and (4), and

(b) in the case of an investment trust that prepares accounts in accordance with international accounting standards, has the meaning given by order made by the Treasury.

(3) In the cases mentioned in sub-paragraph (2)(a) capital profits, gains or losses arising from a [F155 derivative contract] in an accounting period are profits, gains or losses that are carried to or sustained by a capital reserve in accordance with the Statement of Recommended Practice.

(4) For the purposes of this paragraph the Statement of Recommended Practice is, for an accounting period for which it is required or permitted to be used—

(a) the Statement of Recommended Practice relating to Investment Trust Companies, issued by the Association of Investment Trust Companies in January 2003, as from time to time modified, amended or revised, or

(b) any subsequent Statement of Recommended Practice relating to investment trusts, as from time to time modified, amended or revised.

Textual Amendments

F153 Sch. 26 paras. 38, 38A substituted for Sch. 26 para. 38 (with effect in accordance with s. 52(3) of the amending Act) by Finance Act 2004 (c. 12), Sch. 10 para. 63

F154 Words in Sch. 26 para. 38(1) substituted (7.4.2005) by Finance Act 2005 (c. 7), Sch. 4 para. 36

F155 Words in Sch. 26 para. 38(3) substituted (7.4.2005) by Finance Act 2005 (c. 7), Sch. 4 para. 36

Venture capital trusts: capital profits, gains or losses U.K.

38A (1) Capital profits, gains or losses arising to a venture capital trust from a [F156 derivative contract] must not be brought into account as credits or debits for the purposes of this Schedule.

(2) For the purposes of this paragraph “capital profits, gains or losses”—

(a) in the case of a venture capital trust that prepares accounts in accordance with UK generally accepted accounting practice, has the meaning given by sub-paragraphs (3) and (4), and

(b) in the case of a venture capital trust that prepares accounts in accordance with international accounting standards, has the meaning given by order made by the Treasury.

(3) In the cases mentioned in sub-paragraph (2)(a) capital profits, gains or losses arising from a [F157 derivative contract] in an accounting period are profits, gains or losses that are carried to or sustained by a capital reserve in accordance with the Statement of Recommended Practice.

(4) For the purposes of this paragraph the Statement of Recommended Practice is, for an accounting period for which it is required or permitted to be used—

(a) the Statement of Recommended Practice relating to Investment Trust Companies, issued by the Association of Investment Trust Companies in January 2003, as from time to time modified, amended or revised, or

(b) any subsequent Statement of Recommended Practice relating to investment trusts, as from time to time modified, amended or revised.]

Textual Amendments

F153 Sch. 26 paras. 38, 38A substituted for Sch. 26 para. 38 (with effect in accordance with s. 52(3) of the amending Act) by Finance Act 2004 (c. 12), Sch. 10 para. 63

F156 Words in Sch. 26 para. 38A(1) substituted (7.4.2005) by Finance Act 2005 (c. 7), Sch. 4 para. 36

F157 Words in Sch. 26 para. 38A(3) substituted (7.4.2005) by Finance Act 2005 (c. 7), Sch. 4 para. 36

Investment trusts: approval for purposes of section 842 of the Taxes Act 1988 U.K.

39 (1) For the purpose of determining whether a company may be approved for the purposes of section 842 of the Taxes Act 1988 (investment trusts) for any accounting period, the excess of any relevant credits arising in that period over any relevant debits so arising shall be treated for the purposes of that section as income derived from shares or securities.

(2) For the purposes of this paragraph “relevant credits” and “relevant debits”, in relation to an accounting period, are credits and debits which are brought into account in respect of that period by virtue of paragraph 14(3) as if they were non-trading credits and non-trading debits falling to be brought into account for the purposes of Chapter 2 of Part 4 of the Finance Act 1996 (c. 8) in respect of loan relationships of the company.

Venture capital trusts: approval for purposes of section 842AA of the Taxes Act 1988 U.K.

F158 40 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Textual Amendments

F158 Sch. 26 para. 40 repealed (6.4.2007) by Income Tax Act 2007 (c. 3), s. 1034(1), Sch. 1 para. 422(3), Sch. 3 Pt. 1 (with Sch. 2)

Part 8 U.K. Insurance and mutual trading companies

Application of Schedule to insurance and mutual trading companies U.K.

41 (1) This Schedule shall apply in relation to insurance and mutual trading companies as it applies in relation to other companies.

(2) Sub-paragraph (1) is subject to paragraphs 42 and 43.

Application of Part 1 of Schedule 11 to the Finance Act 1996 U.K.

42 (1) Part 1 of Schedule 11 to the Finance Act 1996 (c. 8) (special provision with respect to loan relationships for insurance companies) shall have effect (subject to sub-paragraphs (2) to (4)) in relation to derivative contracts as it has effect in relation to loan relationships.

(2) Any provision of that Part of that Schedule which applies only to debtor relationships F159 ... shall not have effect in relation to derivative contracts for the purposes of sub-paragraph (1).

(3) That Part of that Schedule shall have effect in its application in relation to derivative contracts as if—

(a) references to Chapter 2 of Part 4 of the Finance Act 1996 were references to this Schedule,

(b) references to section 80(5) of that Act were references to paragraph 1(2) of this Schedule,

(c) references to section 82(2) of that Act were references to paragraph 14(2) of this Schedule, and

(d) references to credits and debits given in respect of a loan relationship by Chapter 2 of Part 4 of that Act were references, respectively, to the credits and debits given in respect of a derivative contract by this Schedule.

F160 (4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Textual Amendments

F159 Words in Sch. 26 para. 42(2) 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), 18

F160 Sch. 26 para. 42(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 2005 (S.I. 2005/646), arts. 1(1), 11

F161 43 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Textual Amendments

F161 Sch. 26 para. 43 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), 12

Part 9 U.K. Miscellaneous

Contracts which become derivative contracts U.K.

[F162 43A. (1) This paragraph applies if—

(a) a company is a party to a relevant contract which (having not been a derivative contract) becomes a derivative contract, and

(b) immediately before the time at which the relevant contract becomes a derivative contract, the relevant contract is a chargeable asset.

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

(a) that it had made a disposal of the relevant contract immediately before the relevant time, and

(b) that the disposal had been for a consideration equal to the notional carrying value of the relevant contract at that time.

(3) 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 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).

(4) For the purposes of this paragraph “the relevant time” means the time, on or after 30th December 2006, at which the relevant contract becomes a derivative contract.

(5) For the purposes of this paragraph the “notional carrying value” of a contract at any time is the amount which would have been the carrying value of the contract in the accounts of the company if an accounting period had ended immediately before that time.

Textual Amendments

F162 Sch. 26 paras. 43A, 43B substituted for Sch. 26 paras. 44, 45 (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, 10

Contracts which cease to be derivative contracts U.K.

43B (1) This paragraph applies if a company is party to a relevant contract which (having been a derivative contract) ceases to be a derivative contract.

(2) The company is to be treated—

(a) for the purposes of this Schedule, as if at the relevant time it had disposed of the contract in a related transaction for a consideration of an amount equal to the notional carrying value of the contract at that time, and

(b) for the purposes of TCGA 1992, as if immediately after that time it had reacquired the contract for the same consideration.

(3) In this paragraph “the relevant time” means the time at which the contract ceases to be a derivative contract.

(4) Paragraph 43A(5) (meaning of “notional carrying value”) applies for the purposes of this paragraph.]

Textual Amendments

F162 Sch. 26 paras. 43A, 43B substituted for Sch. 26 paras. 44, 45 (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, 10

F163 44 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Textual Amendments

F163 Sch. 26 para. 44 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, 11

F164 45 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Textual Amendments

F164 Sch. 26 para. 45 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, 11

Derivative contracts which are to be taxed on a chargeable gains basis U.K.

[F165 45A. (1) This paragraph applies to a derivative contract of a company for an accounting period if any of the following provisions applies to the derivative contract for the period—

(a) paragraph 45C (derivative contracts relating to land or certain tangible movable property);

(b) paragraph 45D (creditor relationship with embedded derivative which is an option relating to qualifying ordinary shares or mandatorily convertible preference shares);

(c) paragraph 45F (creditor relationship with embedded derivative which is an exactly tracking contract for differences whose subject matter is land or qualifying ordinary shares);

(d) paragraph 45G (property based total return swaps).

(2) Where this paragraph applies to a derivative contract for an accounting period—

(a) paragraph 14(3) (non-trading credits and debits) shall not apply to the relevant credits and debits, but

(b) sub-paragraph (4) shall apply to them instead.

(3) For the purposes of this paragraph the relevant credits and debits—

(a) in the case of a derivative contract falling within any of paragraphs (a) to (c) of sub-paragraph (1), are the credits and debits given in relation to the contract for the accounting period by paragraph 15;

(b) in the case of a derivative contract falling within paragraph (d) of that sub-paragraph, are the credits and debits described in sub-paragraph (2) of paragraph 45G.

(4) For the purposes of corporation tax on chargeable gains—

(a) if C exceeds D, a chargeable gain equal in amount to the amount of the excess shall be treated as accruing to the company in the accounting period,

(b) if D exceeds C, a loss equal in amount to the amount of the excess shall be treated as accruing to the company in the accounting period,

but this is subject to sub-paragraph (6).

(5) In sub-paragraph (4)—

• C means the sum of the relevant credits for the accounting period in respect of the derivative contract;

• D means the sum of the relevant debits for the accounting period in respect of the derivative contract.

(6) Sub-paragraph (4) does not apply in the case of a derivative contract falling within sub-paragraph (1)(b) (embedded option) if, on the assumption that—

(a) the rights and liabilities that fall to be treated as comprised in the derivative contract by virtue of section 94A of the Finance Act 1996 (loan relationships with embedded derivatives) had been contained in a separate contract,

(b) that separate contract were an actual option,

(c) that option were disposed of at the end of the accounting period, and

(d) a gain accrued for the purposes of corporation tax on chargeable gains to the company on the disposal,

paragraph 2 of Schedule 7AC to [F166 TCGA 1992] (substantial shareholding exemptions: disposal of asset related to shares) would apply to that gain.

Textual Amendments

F165 Sch. 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

F166 Words in Sch. 26 para. 45A(6) 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

Carry back of net losses on derivative contracts to which paragraph 45A applies U.K.

45B. (1) This paragraph applies in the case of a company if the following conditions are satisfied—

(a) there is a net amount of paragraph 45A losses (see sub-paragraph (5)(a)) for an accounting period (the “loss period”),

(b) there is a net amount of paragraph 45A gains (see sub-paragraph (5)(b)) for a previous accounting period (the “gains period”),

(c) the gains period falls wholly or partly within the period of 24 months immediately preceding the start of the loss period,

(d) within 2 years after the end of the loss period the company makes a claim for the purpose in respect of the whole or a part of the net amount of paragraph 45A losses for the loss period.

(2) In any such case—

(a) the net amount of paragraph 45A gains for the gains period, and

(b) the net amount of paragraph 45A losses for the loss period,

shall each be reduced (but not below nil) by the amount in respect of which the claim is made.

(3) For the purposes of sub-paragraph (2)—

(a) the net amount of paragraph 45A gains for a later period must be reduced so far as possible before the net amount of paragraph 45A gains for an earlier period, and

(b) where a gains period falls partly before the start of the 24 month period referred to in sub-paragraph (1), only the appropriate fraction of the net amount of paragraph 45A gains for the gains period may be reduced.

(4) For the purposes of sub-paragraph (3), the “appropriate fraction” is—

where—

• A is the number of days in the gains period that fall within the 24 month period, and

• B is the number of days in the gains period.

(5) For the purposes of this paragraph—

(a) where for any accounting period L exceeds G, there is a net amount of paragraph 45A losses for that period of an amount equal to that excess,

(b) where for any accounting period G exceeds the sum of L and N, there is a net amount of paragraph 45A gains for that period of an amount equal to that excess.

(6) In the application of sub-paragraph (5) in relation to any accounting period of a company—

• G is the sum of the amounts of any chargeable gains treated as accruing to the company in the period under paragraph 45A(4)(a) in respect of derivative contracts of the company (“paragraph 45A gains”),

• L is the sum of the amounts of any allowable losses treated as accruing to the company in the period under paragraph 45A(4)(b) in respect of derivative contracts of the company,

• N is the sum of the amounts of any non-paragraph 45A losses that would fall to be deducted in the period from paragraph 45A gains, on the assumption in sub-paragraph (7).

(7) The assumption is that, as respects the accounting period, non-paragraph 45A losses are treated as being deducted from non-paragraph 45A gains, so far as possible, before any remainder is deducted from paragraph 45A gains.

(8) In this paragraph—

• “deducted” means deducted in accordance with section 8(1) of [F167 TCGA 1992];

• “non-paragraph 45A gains” means any chargeable gains accruing to the company in the accounting period, other than paragraph 45A gains;

• “non-paragraph 45A losses” means any allowable losses of the company that may be deducted in the accounting period, other than losses accruing in the period under paragraph 45A(4)(b).

Textual Amendments

F165 Sch. 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

F167 Words in Sch. 26 para. 45B(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

Derivative contracts relating to land or certain tangible movable property U.K.

45C. (1) This paragraph applies to a derivative contract of a company for an accounting period if the following conditions are satisfied—

(a) the derivative contract 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 (2)),

(b) the company is not a body falling within sub-paragraph (3);

(c) the underlying subject matter of the derivative contract falls within sub-paragraph (4);

F168 (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F169 (1A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(2) The condition in sub-paragraph (1)(a) does not apply if the company—

(a) is party to the derivative contract for the purposes of life assurance business, or

(b) is a mutual trading company.

(3) The bodies that fall within this sub-paragraph are—

• an authorised unit trust;

• an investment trust;

• an open-ended investment company;

• a venture capital trust.

(4) The underlying subject matter of a derivative contract falls within this sub-paragraph if it consists of either or both of the following—

(a) land (wherever situated);

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

This sub-paragraph is subject to the following qualification.

(5) Where the underlying subject matter of a derivative contract includes income from property of either or both of the types described in sub-paragraph (4) and that income is—

(a) subordinate in relation to so much of the underlying subject matter of the derivative contract as consists of property of either or both of those types, or

(b) of small value in comparison with the value of the underlying subject matter as a whole,

that income shall be left out of account in determining for the purposes of sub-paragraph (1)(c) whether the underlying subject matter of the derivative contract falls within sub-paragraph (4).

(6) For the purposes of sub-paragraph (5) whether part of the underlying subject matter of a derivative 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 contract.

Textual Amendments

F165 Sch. 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

F168 Sch. 26 para. 45C(1)(d) 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, 12

F169 Sch. 26 para. 45C(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 2006 (S.I. 2006/3269), arts. 1, 12

Creditor relationships: embedded derivatives which are options U.K.

45D. (1) This paragraph applies to a derivative contract of a company for an accounting period if the following conditions are satisfied—

[F170 (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”),

(b) the derivative contract is treated as an option 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 company is not party to the [F171 original relationship] at any time in the accounting period for the purposes of a trade carried on by it (but see sub-paragraph (3)),

F172 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(c) the underlying subject matter of the derivative contract—

(i) is qualifying ordinary shares (see sub-paragraph (4)), or

(ii) is mandatorily convertible preference shares (see sub-paragraph (4)),

(d) the company is not a body falling within paragraph 45C(3) (authorised unit trusts etc),

(e) this paragraph is not prevented from applying to the derivative contract for the accounting period by paragraph 45E.

[F173 (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 [F174 original relationship] for the purposes of life assurance business, or

(b) is a mutual trading company.

[F175 (3A) Where in any accounting period—

(a) a company is party to a creditor relationship for the purposes of its life assurance business, and

(b) that creditor relationship is one in relation to which section 94A of the Finance Act 1996 would have effect but for the fact that the company accounts for the creditor relationship at fair value through profit and loss,

this [F176 Schedule and Chapter 2 of Part 4 of the Finance Act 1996] shall have effect for that accounting period as it would if the creditor relationship were one in relation to which that section has effect.]

(4) In this paragraph—

• [F177 “existing asset” means an asset in relation to which paragraph 9(2) of Schedule 10 to the Finance Act 2004 has effect;]

• “mandatorily convertible preference shares” means shares—

  (a)

  which represent the creditor relationship,

  (b)

  which are not qualifying ordinary shares, and

  (c)

  which are issued upon terms that stipulate that they must be converted into, or exchanged for, qualifying ordinary shares by a relevant time,

  and for this purpose “relevant time” means a time no more than 24 hours after the acquisition of the shares by a person who, immediately before that acquisition, had the creditor relationship;

• “qualifying ordinary shares” means shares in a company (the “relevant company”) which satisfy the Conditions in sub-paragraphs (5) and (6).

(5) Condition 1 is that the shares are shares representing some or all of the issued share capital (by whatever name called) of the relevant company, other than—

(a) capital the holders of which have a right to a dividend at a fixed rate but have no other right to share in the profits of that company, or

(b) capital the holders of which have no right to a dividend of any description nor any other right to share in the profits of that company.

(6) Condition 2 is that the shares—

(a) are listed on a recognised stock exchange, or

(b) are shares in a holding company or a trading company.

(7) In sub-paragraph (6)—

• “holding company” has the meaning given in paragraph 22(1) of Schedule A1 to [F178 TCGA 1992];

• “trading company” has the meaning given by paragraph 22A of that Schedule.

[F179 (8) The [F180 original relationship] shall not be treated as a qualifying corporate bond by virtue of section 117(A1) of [F181 TCGA 1992].]

[F182 (9) See also paragraph 45H (treatment of gains and losses on terminal exercise of option).]

Textual Amendments

F165 Sch. 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

F170 Sch. 26 para. 45D(1)(a)(b) substituted for Sch. 26 para. 45D(1)(a)-(c) (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, 13(2)

F171 Words in Sch. 26 para. 45D(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, 13(3)

F172 Sch. 26 para. 45D(2)(b) 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), 13(2)(a)

F173 Sch. 26 para. 45D(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, 13(4)

F174 Words in Sch. 26 para. 45D(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, 13(5)

F175 Sch. 26 para. 45D(3A) 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), 13(3)

F176 Words in Sch. 26 para. 45D(3A) 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, 13(6)

F177 Words in Sch. 26 para. 45D(4) 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), 13(4)

F178 Words in Sch. 26 para. 45D(7) 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

F179 Sch. 26 para. 45D(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), 13(5)

F180 Words in Sch. 26 para. 45D(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, 13(7)

F181 Words in Sch. 26 para. 45D(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

F182 Sch. 26 para. 45D(9) 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), 13(6)

Exclusions from paragraph 45D U.K.

45E. (1) Paragraph 45D does not apply to a derivative contract of a company for an accounting period if any of the following Conditions is satisfied in the case of the derivative contract in the period.

F183 (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(3) Condition 1 is that the rights and liabilities that fall to be treated as comprised in the derivative contract are such that the extent to which shares may be acquired in accordance with them is to be determined using a cash value—

(a) which is specified in the contract for the original asset, or

(b) which is or will be ascertainable by reference to that contract.

(4) Condition 2 is that the rights and liabilities that fall to be treated as comprised in the derivative contract are such that—

(a) the company is entitled or obliged to receive a payment instead of the shares which are the underlying subject matter of the derivative contract, and

(b) the amount of that payment differs by more than an insignificant amount from the value of the shares which the company would be entitled to acquire in accordance with those rights and liabilities at the time it became entitled or obliged to receive the payment.

F184 (5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Textual Amendments

F165 Sch. 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

F183 Sch. 26 para. 45E(2) 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, 14

F184 Sch. 26 para. 45E(5) 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), 14

Creditor relationships: embedded derivatives which are exactly tracking contracts for differences U.K.

45F. (1) This paragraph applies to a derivative contract of a company for an accounting period if the following conditions are satisfied—

[F185 (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 [F186 original 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)),

F187 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(c) the underlying subject matter of the derivative contract—

F188 (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)).

[F189 (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 [F190 original 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 [F191 the 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 [F192 the original asset] came into existence, and

(ii) the date when the [F193 debtor 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 [F194 the original asset].

(7) In this paragraph[F195 —

• “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).

[F196 (8) The [F197 original relationship] shall not be treated as a qualifying corporate bond by virtue of section 117(A1) of [F198 TCGA 1992].]

Textual Amendments

F165 Sch. 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

F185 Sch. 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)

F186 Words 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)

F187 Sch. 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

F188 Sch. 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)

F189 Sch. 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)

F190 Words 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)

F191 Words 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)

F192 Words 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)

F193 Words 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)

F194 Words 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)

F195 Words 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)

F196 Sch. 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)

F197 Words 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)

F198 Words 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

Creditor relationships: existing assets U.K.

[F199 45FA. (1) This paragraph applies if paragraph 45D or 45F would apply to a derivative contract for an accounting period but for sub-paragraph (2)(f) of that paragraph.

(2) Paragraph 14(3) (non-trading debits and credits) shall not apply to the credits and debits given in relation to the contract for the accounting period by paragraph 15.

(3) The original creditor relationship by virtue of which paragraph 45D or 45F would apply to the derivative contract shall not be treated as a qualifying corporate bond by virtue of section 117(A1) of TCGA 1992.

(4) For the purposes of TCGA 1992 the amount or value of the consideration for any disposal of the original asset shall be treated as adjusted so as to exclude so much of it as, on a just and reasonable apportionment, relates to any interest which—

(a) falls to be brought into account under Chapter 2 of Part 4 of the Finance Act 1996 (loan relationships) as accruing to any company at any time; and

(b) in consequence of, or of the terms of, the disposal, is not paid or payable to the company to which it is treated for the purposes of that Chapter as accruing.

(5) Where—

(a) there has been a reorganisation for the purposes of sections 126 to 132 of TCGA 1992, and

(b) for the purposes of those sections, the original asset mentioned in sub-paragraph (4) is treated as the original shares,

the reference in sub-paragraph (4) to the disposal of the original asset includes a reference to the disposal of the asset which, as a result of the reorganisation, has become the new holding for the purposes of those sections.

(6) For the purposes of TCGA 1992 the amount or value of the consideration for any disposal by a company of the original asset—

(a) shall be increased by the addition of any relevant exchange losses, and

(b) shall (after giving effect to any such increase) be reduced (but not below nil) by the deduction of any relevant exchange gains,

but this sub-paragraph does not apply in a case where paragraph 45F would apply but for sub-paragraph (2)(f) of that paragraph.

(7) For the purposes of sub-paragraph (6), “relevant exchange gains” and “relevant exchange losses” are—

(a) the amount of any exchange gains or losses in respect of the original asset that are brought into account under Chapter 2 of Part 4 of the Finance Act 1996 by the company for an accounting period throughout which the company holds the original asset; and

(b) for any accounting period not falling within paragraph (a) in which the company holds the original asset, an amount which, on a just and reasonable apportionment, represents so much of the amount of any exchange gains or losses brought into account under that Chapter in respect of the original asset, by the company making the disposal, for that period as is referable to the part of the period for which the company holds the asset.

(8) Where the amount of the relevant exchange gains falling to be deducted under sub-paragraph (6)(b) exceeds the amount required to reduce the amount or value of the consideration to nil, the excess shall be treated for the purposes of section 38(1)(c) of TCGA 1992 as incidental costs of making the disposal of the original asset.]

Textual Amendments

F165 Sch. 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

F199 Sch. 26 para. 45FA 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, 16

Property based total return swaps U.K.

45G. (1) This paragraph applies to a derivative contract of a company for an accounting period if the following conditions are satisfied—

(a) the derivative contract is a contract for differences,

(b) one or more indices are designated in the contract,

(c) at least one index so designated (the “capital value index”) is an index of changes in the value of land (wherever situated),

(d) the underlying subject matter of the derivative contract also includes interest rates.

[F200 (e) the additional conditions in sub-paragraph (1A) are satisfied.

(1A) The additional conditions are—

(a) the derivative contract 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 (1B)), and

(b) the company is not a body falling within paragraph 45C(3) (authorised unit trusts etc).

(1B) The condition in sub-paragraph (1A)(a) does not apply if the company—

(a) is party to the derivative contract for the purposes of life assurance business, or

(b) is a mutual trading company.]

(2) In any such case, the relevant credits and debits for the purposes of paragraph 45A(3)(b) are those which—

(a) are given in relation to the derivative contract for the accounting period by paragraph 15, and

(b) fall within sub-paragraph (3).

(3) The credits and debits are those found for the period by applying R% to N, where—

• N is the amount which is the notional principal amount in the case of the derivative contract;

• R% is the percentage change (if any) in the capital value index over the relevant period.

(4) In sub-paragraph (3) “the relevant period” means—

(a) the accounting period, if the company is party to the derivative contract throughout that period;

(b) in any other case, any part of the accounting period throughout which the company is party to the derivative contract.

Textual Amendments

F165 Sch. 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

F200 Sch. 26 para. 45G(1)(e), (1A)(1B) 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 No. 2) Order 2004 (S.I. 2004/3270), arts. 1(1), 8

Treatment of net gains and losses on terminal exercise of option U.K.

[F201 45H. (1) This paragraph applies where—

(a) a derivative contract is one to which paragraph 45D applies for an accounting period,

(b) rights that fall to be treated as comprised in the derivative contract are [F202 to any extent exercised or otherwise disposed of] in the accounting period, and

(c) those rights are rights to acquire shares.

(2) In any such case—

[F203 (a) sub-paragraph (3) has effect in relation to a disposal of the asset representing the original creditor relationship mentioned in paragraph 45D(1)(a) (“the original relationship”), and]

(b) sub-paragraph (4) has effect in relation to a disposal of all or any of the shares (“the relevant shares”) acquired—

[F204 (i) as a result of the exercise of rights mentioned in sub-paragraph (1)(b); and

(ii) in circumstances where a disposal is deemed not to occur by virtue of section 127 of [F205 TCGA 1992].]

(3) For the purpose of computing any chargeable gain accruing to the company on a disposal of the [F206 original asset], the sums allowable as a deduction under section 38(1)(a) of [F207 TCGA 1992] (acquisition costs) shall—

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

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

(4) For the purpose of computing any chargeable gain accruing to the company on a disposal of all the relevant shares, the sums allowable as a deduction under section 38(1)(a) of [F207 TCGA 1992] (acquisition costs) shall—

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

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

and, in the case of a part disposal of those shares, section 42(2) of that Act shall have effect accordingly.

(5) If the amount of the excess in sub-paragraph (3)(b) or (4)(b) is greater than the amount of expenditure allowable under section 38(1)(a) of [F207 TCGA 1992], the amount of the excess that cannot be deducted from the expenditure so allowable shall, for the purpose mentioned in sub-paragraph (3) or (4) (as the case may be), be added to the amount of the consideration for the disposal of the shares.

[F208 (5A) Sections 37 and 39 of TCGA 1992 do not apply in relation to a disposal mentioned in sub-paragraph (1)(b), (2)(a) or (b) above.]

(6) In this paragraph—

• G is the sum of—

  (a)

  [F209 the relevant Chapter 2 amount, and]

  (b)

  the amounts of any chargeable gains treated as accruing to the company under paragraph 45A(4)(a) in respect of the derivative contract in each relevant accounting period, so far as referable, on a just and reasonable apportionment, to the shares acquired as a result of the exercise of rights mentioned in sub-paragraph (1)(b);

• L is the sum of the amounts of any allowable losses treated as accruing to the company under paragraph 45A(4)(b) in respect of the derivative contract in each relevant accounting period, so far as so referable.

(7) For the purposes of sub-paragraph (6)—

[F210 (a) the “relevant Chapter 2 amount” means the amount by which the carrying value of the loan-contract host contract at the date on which the option is exercised exceeds the carrying value of that contract at—

(i) the date on which the company became party to the original relationship, or

(ii) (if later) the date on which the derivative contract became one to which paragraph 45D applies;]

(b) a “relevant accounting period” is—

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

(ii) any previous accounting period.]

Textual Amendments

F165 Sch. 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

F201 Sch. 26 paras. 45H, 45HA 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), 17

F202 Words in Sch. 26 para. 45H(1)(b) 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, 9(2)

F203 Sch. 26 para. 45H(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, 17(2)

F204 Sch. 26 para. 45H(2)(b)(i)(ii) 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, 9(3)

F205 Words in Sch. 26 para. 45H(2)(b)(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, 30

F206 Words in Sch. 26 para. 45H(3) 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, 17(3)

F207 Words in Sch. 26 paras. 45H(3)-(5) 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

F208 Sch. 26 para. 45H(5A) 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, 17(4)

F209 Words in Sch. 26 para. 45H(6) 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, 17(5)

F210 Sch. 26 para. 45H(7)(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, 17(6)

Treatment of net gains and losses on disposal of certain embedded derivatives U.K.

[F211 45HZA. (1) This paragraph applies where—

(a) a derivative contract is one to which paragraph 45F (creditor relationships: embedded derivatives which are exactly tracking contracts for differences) applies for an accounting period, and

(b) the asset representing the original relationship mentioned in paragraph 45F(1)(a) is disposed of in the accounting period.

(2) For the purpose of computing any chargeable gain accruing to the company on the disposal, the sums allowable as a deduction under section 38(1)(a) of TCGA 1992 (acquisition costs) shall—

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

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

(3) If the amount of the excess in sub-paragraph (2)(b) 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 so allowable shall, for the purpose mentioned in sub-paragraph (2), be added to the amount of the consideration for the disposal.

(4) Sections 37 and 39 of TCGA 1992 do not apply in relation to the disposal.

(5) In this paragraph—

• G is the sum of—

  (a)

  the relevant Chapter 2 amount, and

  (b)

  the amount of any chargeable gains treated as accruing to the company under paragraph 45A(4)(a) in respect of the derivative contract in each relevant accounting period, and

• L is the sum of the amounts of any allowable losses treated as accruing to the company under paragraph 45A(4)(b) in respect of the derivative contract in each relevant accounting period.

(6) For the purposes of paragraph (5)—

(a) the relevant Chapter 2 amount means the amount by which the carrying value of the loan-contract host contract at the date of the disposal exceeds the carrying value of that contract at the date on which the company became party to the original relationship;

(b) a relevant accounting period is—

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

(ii) any previous accounting period.]

Textual Amendments

F165 Sch. 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

F211 Sch. 26 para. 45HZA 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, 18

[F212 Treatment of credits and debits on terminal exercise of non-embedded option or running to delivery of future] U.K.

[F201 [F212 45HA. (1) This paragraph applies where—

(a) a company is party to a derivative contract in an accounting period,

(b) the derivative contract is a plain vanilla contract which is an option,

(c) rights comprised in the plain vanilla contract are exercised to any extent in that accounting period, and

(d) those rights are rights to acquire shares.

(1A) This paragraph also applies where—

(a) a company is party to a derivative contract in an accounting period,

(b) the derivative contract is a plain vanilla contract which is a future,

(c) delivery is taken of an asset in accordance with the terms of the future, and

(d) that asset is shares.]

(2) [F213 Where this paragraph applies], for the purpose of computing any chargeable gain accruing to the company on a disposal by it of all the shares [F214 acquired or delivered], the sums allowable as a deduction under section 38(1)(a) of [F215 TCGA 1992] (acquisition costs) shall—

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

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

and, in the case of a part disposal of those shares, section 42(2) of that Act shall have effect accordingly.

(3) If the amount of the excess in sub-paragraph (2)(b) is greater than the amount of expenditure allowable under section 38(1)(a) of [F216 TCGA 1992], the amount of the excess that cannot be deducted from the expenditure so allowable shall, for the purpose mentioned in sub-paragraph (2), be added to the amount of the consideration for the disposal of the shares.

(4) In this paragraph—

• G is the sum of the credits brought into account under [F217 paragraph 14(3)] in respect of the derivative contract in each relevant accounting period so far as referable, on a just and reasonable apportionment, to the shares acquired as a result of the exercise of the rights mentioned in [F218 sub-paragraph (1)(c) or the delivery mentioned in sub-paragraph (1A)(c)];

• L is the sum of the debits brought into account under [F217 paragraph 14(3)] in respect of the derivative contract in each relevant accounting period, so far as so referable.

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

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

(b) any previous accounting period.]

Textual Amendments

F165 Sch. 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

F201 Sch. 26 paras. 45H, 45HA 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), 17

F212 Words in Sch. 26 para. 45HA 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, 19(2)

F213 Words in Sch. 26 para. 45HA(2) 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, 19(3)(a)

F214 Words in Sch. 26 para. 45HA(2) 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, 19(3)(b)

F215 Words in Sch. 26 para. 45HA(2) 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

F216 Words in Sch. 26 para. 45HA(3) 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

F217 Words in Sch. 26 para. 45HA(4) 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, 10

F218 Words in Sch. 26 para. 45HA(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, 19(4)

F219 45H. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Textual Amendments

F165 Sch. 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

F219 Sch. 26 para. 45H 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 No. 2) Order 2004 (S.I. 2004/3270), arts. 1(1), 9

Index-linked gilt-edged securities with embedded contracts for differences U.K.

45I. (1) This paragraph applies to a derivative contract of a company for an accounting period if the following conditions are satisfied—

[F220 (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,]

(b) that creditor relationship is an index-linked gilt-edged security,

(c) the credits and debits which fall to be brought into account for the accounting period for the purposes of Chapter 2 of Part 4 of the Finance Act 1996 in respect of the [F221 loan-contract host contract] are non-trading credits and non-trading debits,

F222 (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(e) [F223 the derivative contract is treated by virtue of section 94A(3) of the Finance Act 1996] as a contract for differences.

(2) The credits and debits that would, apart from this paragraph, fall to be brought into account under this Schedule in respect of the derivative contract for the accounting period shall not be so brought into account.

(3) In this paragraph—

• F224 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

• “gilt-edged security” has the meaning given by section 103(1) of the Finance Act 1996;

• “index-linked gilt-edged security” means any gilt-edged security the amount of the payments under which is determined wholly or partly by reference to the retail prices index;

• “the retail prices index” has the same meaning as in the Income Tax Acts ([F225 section 989 of ITA 2007]).]

Textual Amendments

F165 Sch. 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

F220 Sch. 26 para. 45I(1)(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, 20(2)

F221 Words in Sch. 26 para. 45I(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 2006 (S.I. 2006/3269), arts. 1, 20(3)

F222 Sch. 26 para. 45I(1)(d) 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, 20(4)

F223 Words in Sch. 26 para. 45I(1)(e) 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, 20(5)

F224 Words in Sch. 26 para. 45I(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, 20(6)

F225 Words in Sch. 26 para. 45I(3) substituted (6.4.2007) by Income Tax Act 2007 (c. 3), s. 1034(1), Sch. 1 para. 422(4) (with Sch. 2)

Issuers of securities with embedded derivatives: deemed options U.K.

[F226 45J. (1) This paragraph applies to a derivative contract of a company for an accounting period if the following conditions are satisfied—

[F227 (a) the derivative contract is a loan-contract embedded derivative to which the company is treated as party by virtue of a debtor relationship of the company (“the original relationship”),]

(c) [F228 the derivative contract is treated by virtue of section 94A(3) of the Finance Act 1996] as an option,

(d) the additional conditions in sub-paragraph (2) are satisfied,

(2) The additional conditions are—

(a) at the time when the company became party to the [F229 original] relationship—

(i) it was not carrying on a banking business or a business as a securities house, or

(ii) if it was carrying on such a business, it did not become party to the [F229 original] relationship in the ordinary course of that business,

F230 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(c) the underlying subject matter of the derivative contract is shares,

(d) the company is not a body falling within paragraph 45C(3) (authorised unit trusts etc).

(3) Where this paragraph applies to a derivative contract for an accounting period—

(a) paragraph [F231 14(2) and (3) (trading and non-trading] credits and debits) shall not apply to the credits and debits given in relation to the contract for the accounting period by paragraph 15, but

(b) sub-paragraph (5), (7) or [F232 (9A)] (as the case may be) of this paragraph shall, subject to sub-paragraph (4), apply instead.

[F233 (4) If the company was a party to the [F234 original] relationship immediately before its first accounting period to begin on or after 1st January 2005—

(a) sub-paragraphs (5) and (9) do not apply, but

(b) where sub-paragraph (7) applies, E shall be taken to be nil and an allowable loss of an amount equal to F shall accordingly be treated as accruing to the company in the accounting period there mentioned.]

[F235 (4A) Sub-paragraph (5) applies if—

(a) the option mentioned in sub-paragraph (1)(c) is exercised at any time in an accounting period, and

(b) shares are issued or transferred in fulfilment of the obligations under the option (the “relevant disposal”).

(5) Where this sub-paragraph applies—

(a) section 144(2) of [F236 TCGA 1992] (exercise of options) applies to the relevant disposal as if the amount treated in accordance with section 94A(2) of the Finance Act 1996 as the carrying value of the option at the time the company became party to the loan relationship (the “initial carrying value”) was the consideration for the grant of the option;

(b) to the extent that it would otherwise apply, section 17(1) of the Taxation of Chargeable Gains Act 1992 (deemed market value consideration) does not apply to the relevant disposal.]

(6) Sub-paragraph (7) applies if—

(a) the option mentioned in sub-paragraph (1)(c) is exercised at any time in an accounting period,

(b) there is no relevant disposal, and

(c) an amount is paid in fulfilment of the obligations under the option.

(7) Where this sub-paragraph applies—

(a) if E exceeds F, a chargeable gain equal in amount to the amount of the excess shall be treated as accruing to the company in the accounting period,

(b) if F exceeds E, an allowable loss equal in amount to the amount of the excess shall be treated as accruing to the company in the accounting period,

[F237 (8) In sub-paragraph (7)—

• E is—

  (a)

  in a case where the company was a party to the original relationship at the time it was created, the initial carrying value of the option, and

  (b)

  in a case where the company became a party to the original relationship at a later time, the carrying value of the option at that time;

• F is the amount paid by the debtor in fulfilment of the obligations under the original relationship reduced (but not below nil) by the fair value of the loan-contract host contract at the date on which the option is exercised.

(9) Sub-paragraph (9A) applies if the company ceases to be a party to the original relationship at a time when the option mentioned in sub-paragraph (1)(c) has not been exercised.

(9A) The company is treated for the purposes of corporation tax on chargeable gains—

(a) as having disposed of an asset for a consideration equal to G, and

(b) as having acquired that asset for a consideration equal to H.

(9B) In sub-paragraph (9A)—

• G is—

  (a)

  in a case where the company was a party to the original relationship at the time it was created, the initial carrying value of the option, and

  (b)

  in a case where the company became a party to the original relationship at a later time, the carrying value of the option at that time;

• H is—

  (a)

  in a case where the company ceases to be a party to the original relationship as a result of the redemption or repayment of the liability representing the original relationship, the amount paid by the company, and

  (b)

  in any other case, the consideration given by the company on its ceasing to be party to the original relationship,

in either case reduced (but not below nil) by the fair value of the loan-contract host contract at the date on which it so ceases.]

(10) In this paragraph—

• “option” has the same meaning as in paragraph 12, apart from sub-paragraph (10);

• “securities house” means a person—

  (a)

  who is authorised for the purposes of the Financial Services and Markets Act 2000, and

  (b)

  whose business consists wholly or mainly of dealing as a principal in financial instruments within the meaning of [F238 section 984 of ITA 2007].

Textual Amendments

F226 Sch. 26 paras. 45J-45L 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 No. 2) Order 2004 (S.I. 2004/3270), arts. 1(1), 10

F227 Sch. 26 para. 45J(1)(a) substituted for Sch. 26 para. 45J(1)(a)(b) (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, 21(2)

F228 Words in Sch. 26 para. 45J(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 2006 (S.I. 2006/3269), arts. 1, 21(3)

F229 Word in Sch. 26 para. 45J(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, 21(4)

F230 Sch. 26 para. 45J(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), 16

F231 Words in Sch. 26 para. 45J(3)(a) 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), 18(2)

F232 Word in Sch. 26 para. 45J(3)(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, 21(5)

F233 Sch. 26 para. 45J(4) 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), 18(3)

F234 Word in Sch. 26 para. 45J(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, 21(4)

F235 Sch. 26 para. 45J(4A)(5) substituted for Sch. 26 para. 45J(5) (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), 18(4)

F236 Words in Sch. 26 para. 45J(5)(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, 30

F237 Sch. 26 paras. 45J(8)-(9B) substituted for Sch. 26 para. 45J(8)(9) (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, 21(6)

F238 Words in Sch. 26 para. 45J(10) substituted (6.4.2007) by Income Tax Act 2007 (c. 3), s. 1034(1), Sch. 1 para. 422(5) (with Sch. 2)

Issuers of securities with embedded derivatives: equity instruments U.K.

[F239 45JA (1) This paragraph applies to a company for an accounting period if the following conditions are satisfied—

[F240 (a) the company is party to a loan-contract embedded derivative by virtue of a debtor relationship of the company (“the original relationship”)]

(b) the division mentioned in [F241 section 94A(1) of the Finance Act 1996 in the case of the original relationship] is between—

(i) rights and liabilities under a loan relationship, and

(ii) rights and liabilities under an equity instrument [F242 of the company] ,

(c) in the case of that debtor relationship, the company is treated under subsection (2)(b)(i) of that section as party to a relevant contract,

(d) the relevant contract is treated by virtue of subsection (3) of that section as an option,

F243 (e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(f) the company pays an amount in the accounting period to the person who is party to the [F244 original] relationship as creditor in discharge of any obligations under that relationship,

(g) the additional conditions in sub-paragraph (2) are satisfied.

(2) The additional conditions are—

(a) at the time when the company became party to the [F245 original] relationship—

(i) it was not carrying on a banking business or a business as a securities house, or

(ii) if it was carrying on such a business, it did not become party to the [F245 original] relationship in the ordinary course of that business;

(b) the liability representing the [F246 original] relationship was not owed by the company immediately before its first accounting period to begin on or after 1st January 2005; and

(c) the company is not a body falling within paragraph 45C(3) (authorised unit trusts etc.).

(3) If RA exceeds E, an allowable loss equal to the amount of the excess shall be treated as accruing to the company for the purposes of corporation tax on chargeable gains in the accounting period.

(4) In sub-paragraph (3)—

• [F247 RA is the amount paid as mentioned in sub-paragraph (1)(f) reduced (but not below nil) by an amount equal to the fair value of the loan-contract host contract at the time that amount is paid;]

• E is the amount treated in accordance with section 94A(2) of the Finance Act 1996 as the carrying value of the relevant contract at the time the company became party to the [F248 original] relationship.

(5) In this paragraph “option” and “securities house” have the same meaning as in paragraph 45J(10).]

Textual Amendments

F226 Sch. 26 paras. 45J-45L 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 No. 2) Order 2004 (S.I. 2004/3270), arts. 1(1), 10

F239 Sch. 26 para. 45JA 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), 19

F240 Sch. 26 para. 45JA(1)(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, 22(2)(a)

F241 Words in Sch. 26 para. 45JA(1)(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, 22(2)(b)

F242 Words in Sch. 26 para. 45JA(1)(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, 22(2)(c)

F243 Sch. 26 para. 45JA(1)(e) 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, 22(3)

F244 Word in Sch. 26 para. 45JA(1)(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, 22(4)

F245 Word in Sch. 26 para. 45JA(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, 22(5)

F246 Word in Sch. 26 para. 45JA(2)(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, 22(5)

F247 Words in Sch. 26 para. 45JA(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, 22(6)

F248 Word in Sch. 26 para. 45JA(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, 22(7)

Issuers of securities with embedded derivatives: deemed contracts for differences U.K.

45K. (1) This paragraph applies to a derivative contract of a company for an accounting period if the following conditions are satisfied—

[F249 (a) the derivative contract is a loan-contract embedded derivative to which the company is treated as party by virtue of a debtor relationship of the company (“the original relationship”),]

(c) the relevant contract is treated by virtue of subsection (3) of that section as a contract for differences (other than one which falls within paragraph 45J), and

[F250 (d) the derivative contract is an exactly tracking contract within the meaning of sub-paragraph (2A), and]

(e) the additional conditions in sub-paragraph (2) are satisfied.

(2) The additional conditions are—

(a) at the time when the company became party to the [F251 original] relationship—

(i) it was not carrying on a banking business or a business as a securities house, or

(ii) if it was carrying on such a business, it did not become party to the [F251 original] relationship in the ordinary course of that business,

F252 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(c) the underlying subject matter of the derivative contract is F253 ... shares,

(d) the company is not a body falling within paragraph 45C(3) (authorised unit trusts etc).

[F254 (e) the liability representing the [F255 original] relationship was not owed by the company immediately before its first accounting period to begin on or after 1st January 2005.]

[F256 (2A) 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 (2B));

• 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 proceeds of issue of the liability which represents the original relationship.

(2B) In sub-paragraph (2A), 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, or

(b) any index of the value of those assets.

(2C) In sub-paragraph (2B) “the relevant period” means—

(a) the period between—

(i) the date when the liability representing the original relationship came into existence, and

(ii) the date when the corresponding creditor relationship 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 the liability representing the original relationship.]

(3) Where this paragraph applies to a derivative contract for an accounting [F257 period—

(a) paragraph 14(2) and (3) (trading and non-trading] credits and debits) shall not apply to credits and debits given in relation to the contract for the accounting period by paragraph 15[F258 , but

(b) sub-paragraph (3A) shall have effect.]

[F259 (3A) Where—

(a) the [F260 original] relationship comes to an end, and

(b) an amount (“the discharge amount”) is paid to discharge all the company’s obligations under that relationship,

then, for the purposes of corporation tax on chargeable gains, there shall be treated as accruing to the company a chargeable gain or allowable loss of an amount determined in accordance with sub-paragraph (3B).

(3B) That amount is the amount of the gain or loss (as the case may be) that would accrue on the assumption that—

(a) the derivative contract is an asset of the company,

(b) there is a disposal of that asset at the time when the [F261 original] relationship comes to an end,

[F262 (c) the consideration for the disposal of that asset—

(i) in a case where the company was party to the original relationship at the time it was created, is equal to the amount of the proceeds of issue of the security representing that relationship, and

(ii) in a case where the company became party to the original relationship after that time, is equal to the amount of the carrying value of the loan-contract host contract at that time, and]

(d) the cost of the asset is equal to the discharge amount.]

(4) In this paragraph “securities house” has the same meaning as in paragraph 45J (see sub-paragraph (10) of that paragraph).

Textual Amendments

F226 Sch. 26 paras. 45J-45L 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 No. 2) Order 2004 (S.I. 2004/3270), arts. 1(1), 10

F249 Sch. 26 para. 45K(1)(a) substituted for Sch. 26 para. 45K(1)(a)(b) (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, 23(2)(a)

F250 Sch. 26 para. 45K(1)(d) 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, 23(3)

F251 Word in Sch. 26 para. 45K(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, 23(4)

F252 Sch. 26 para. 45K(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), 17

F253 Words in Sch. 26 para. 45K(2)(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, 23(5)

F254 Sch. 26 para. 45K(2)(e) 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), 20(3)

F255 Word in Sch. 26 para. 45K(2)(e) 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, 23(4)

F256 Sch. 26 paras. 45K(2A)-(2C) 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, 23(6)

F257 Sch. 26 para. 45K(3)(a) substituted for words (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), 20(4)(a)

F258 Sch. 26 para. 45K(3)(b) and word 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), 20(4)(b)

F259 Sch. 26 para. 45K(3A)(3B) 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), 20(5)

F260 Word in Sch. 26 para. 45K(3A)(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, 23(7)

F261 Word in Sch. 26 para. 45K(3B)(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, 23(7)

F262 Sch. 26 para. 45K(3B)(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, 23(8)

Securities with embedded options: existing liabilities U.K.

[F263 45KA. (1) Where in any accounting period paragraph 45K would apply to a derivative contract but for sub-paragraph (2)(e) of that paragraph, paragraph 14(3) (non-trading credits and debits) shall not apply to the relevant credits and debits.

(2) For the purposes of this paragraph the relevant credits and debits are the credits and debits given in relation to the contract for the accounting period by paragraph 15.]

Textual Amendments

F226 Sch. 26 paras. 45J-45L 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 No. 2) Order 2004 (S.I. 2004/3270), arts. 1(1), 10

F263 Sch. 26 para. 45KA 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, 24

Derivatives not embedded in a loan relationship U.K.

45L. [F264 (1) This paragraph applies where—

(a) a company is party to a non-financial embedded derivative or a nested derivative (“the contract”),]

[F265 (aa) the contract is a derivative contract falling within paragraph 3(1)(a),

(ab) paragraph 45M does not apply in relation to the contract,]

(b) regulation 9 of the Disregard Regulations (interest rate contracts) does not apply to the contract[F266 , and

(c) no election having effect in relation to the derivative contract is or has been made under sub-paragraph (2A),]

F267 ...

[F268 [F269 (1A) In this paragraph “the original contract” means—

(a) the non-financial contract mentioned in paragraph 2A to which the company is party, and as a result of which the company falls to be treated under paragraph 2A(2) as party to the non-financial embedded derivative; or

(b) the hybrid derivative mentioned in paragraph 2B to which the company is party, and as a result of which the company falls to be treated under paragraph 2B(2) as party to the nested derivative.]

(1B) Where this paragraph applies—

(a) paragraph 14(2) and (3) (trading and non-trading credits and debits) do not apply in relation to the derivative contract, but

(b) sub-paragraph (1C) or (2) applies in relation to the original contract, according to [F270 whether that contract is a hybrid derivative or a non-financial contract] .

(1C) If the original contract is [F271 a hybrid derivative], profits and losses are to be computed for the purposes of this Schedule as if that contract—

[F272 (a) were not one where the rights and liabilities are treated for accounting purposes as divided as mentioned in sub-paragraph (2) of paragraph 2B, and]

(b) were not one in relation to which a fair value basis of accounting is used.

(2) [F273 If the contract is a non-financial contract], profits and losses are to be brought into account for the purposes of the Corporation Tax Acts in relation to that contract as if that contract—

[F274 (a) were not one where the rights and liabilities are treated for accounting purposes as divided as mentioned in sub-paragraph (2) of paragraph 2A, and]

(b) were not one in relation to which a fair value basis of accounting is used.

[F275 and, accordingly, this Schedule shall not apply to the contract, but section 42 of the Finance Act 1998 shall apply to the contract as if fair value accounting were not generally accepted accounting practice in relation to the company.]

This sub-paragraph has effect notwithstanding paragraph 1(2).]

[F276 (2A) A company may elect that this paragraph is not to apply to any of its contracts [F277 unless—

(a) the contract is a contract of long-term insurance, or

(b) the underlying subject matter of the embedded derivative contract is, or includes, commodities.

Paragraph 45LA contains further provisions about elections under this sub-paragraph.]

(2B) Any such election—

(a) must be made by giving notice in writing to Her Majesty’s Revenue and Customs,

(b) must be made before the end of the first applicable accounting period of the company, and

(c) is irrevocable.

(2C) For the purposes of sub-paragraph (2B), the “first applicable accounting period” is the first accounting period ending on or after 17th August 2005 in which the conditions in paragraphs (a) to (b) of sub-paragraph (1) are satisfied.

(3) In this paragraph “the Disregard Regulations” means the Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) Regulations 2004.]]

Textual Amendments

F226 Sch. 26 paras. 45J-45L 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 No. 2) Order 2004 (S.I. 2004/3270), arts. 1(1), 10

F264 Words in Sch. 26 para. 45L(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, 25(2)

F265 Sch. 26 para. 45L(1)(aa)(ab) 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), 21(2)(c)

F266 Sch. 26 para. 45L(1)(c) and word 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), 21(2)(d)

F267 Words in Sch. 26 para. 45L(1) omitted (with effect in accordance with art. 1 of the amending S.I.) by virtue of The Finance Act 2002, Schedule 26 (Parts 2 and 9) (Amendment No. 3) Order 2005 (S.I. 2005/3440), arts. 1, 12(2)(c)

F268 Sch. 26 paras. 45L(1A)-(1C)(2) substituted for Sch. 26 para. 45L(2) (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, 12(3)

F269 Sch. 26 para. 45L(1A) 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, 25(3)

F270 Words in Sch. 26 para. 45L(1B)(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, 25(4)

F271 Words in Sch. 26 para. 45L(1C) 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, 25(5)(a)

F272 Sch. 26 para. 45L(1C)(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, 25(5)(b)

F273 Words in Sch. 26 para. 45L(2) 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, 25(6)(a)

F274 Sch. 26 para. 45L(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, 25(6)(b)

F275 Words in Sch. 26 para. 45L(2) 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, 25(6)(c)

F276 Sch. 26 para. 45L(2A)(2B)(2C) 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), 21(4)

F277 Words in Sch. 26 para. 45L(2A) 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, 12(4)

Elections under paragraph 45L(2A): further provisions U.K.

[F278 45LA. (1) In this paragraph “a disapplication election” means an election under paragraph 45L(2A).

(2) Where—

(a) a company makes a disapplication election in relation to its contracts, and

(b) another company, which is a member of the same group as the company making the election, is a party to a contract to which the election applies,

the other company shall be treated, in relation to that contract, as if it had also made a disapplication election.

(3) Where—

(a) a company (“the electing company”) makes a disapplication election in relation to its contracts,

(b) another company (“the transferee”) becomes party to a contract, to which paragraph 2(3) applies, in place of the electing company (whether before or after the disapplication election is made), and

(c) the transferee is a member of the same group of companies as the electing company at the time of the transfer,

the transferee shall be treated, in relation to the contract referred to in paragraph (b), as if it had also made a disapplication election.

(4) Where—

(a) a company (“A”) is treated under [F279 paragraph 2A or 2B] as party to a relevant contract to which paragraph 45L(1) applies,

(b) another company (“B”), becomes a party to that contract in place of A,

(c) A and B are members of the same group of companies when B becomes a party to the contract, and

(d) paragraph 45L(1) does not apply to B’s other relevant contracts by reason of a disapplication election (whenever made),

sub-paragraph (5) applies, unless A, subsequent to B’s becoming party to the contract, makes a disapplication election.

(5) Where this sub-paragraph applies B shall be treated, in relation to the contract referred to in sub-paragraph (4)(b), as if paragraph 45L(1) applied to it.

(6) In this paragraph references to companies being members of the same group of companies shall be construed in accordance with section 170 of [F280 TCGA 1992].]

Textual Amendments

F278 Sch. 26 para. 45LA and cross-heading 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, 13

F279 Words in Sch. 26 para. 45LA(4)(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, 26

F280 Words in Sch. 26 para. 45LA(6) 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

Treatment of host contract as a loan relationship U.K.

[F281 45M. [F282 (1) This paragraph applies where for an accounting period—

(a) a company is party to a hybrid derivative contract falling within paragraph 3(1)(b),

(b) the nested derivative is a derivative contract falling within paragraph 3(1)(a),

(c) the underlying subject matter of the derivative contract consists, or is treated as consisting, wholly of—

(i) shares in a company, or

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

(d) the quasi-derivative host contract is treated for accounting purposes as, or as forming part of, a financial asset.

(2) Where this paragraph applies—

(a) the quasi-derivative host contract shall be treated for the purposes of the Corporation Tax Acts as if it were a creditor relationship of the company, and

(b) the nested derivative shall be treated—

(i) as satisfying the conditions in paragraph 4(2A), and

(ii) as a chargeable asset (within the meaning of paragraph 4A(4)).]

F283 (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(4) Paragraph 9 applies for the purpose of determining whether the underlying subject matter is to be treated as consisting wholly of property referred to in sub-paragraph (1)(c).

F284 (5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F285 (6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .]

Textual Amendments

F281 Sch. 26 para. 45M 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), 18

F282 Sch. 26 para. 45M(1)(2) 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, 27(2)

F283 Sch. 26 para. 45M(3) 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), 22(4)

F284 Sch. 26 para. 45M(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 2006 (S.I. 2006/3269), arts. 1, 27(3)

F285 Sch. 26 para. 45M(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 2006 (S.I. 2006/3269), arts. 1, 27(3)

Contracts where part of underlying subject matter of excluded type U.K.

46 (1) This paragraph applies to a relevant contract of a company—

(a) which is an option or future,

(b) which satisfies the requirements of paragraph (accounting requirements etc), and

(c) whose underlying subject matter falls within sub-paragraph (2).

(2) The underlying subject matter of a relevant contract falls within this sub-paragraph if it consists of—

(a) any one or more of the excluded types of property falling within paragraphs [F286 (a) and (b)] of sub-paragraph (2) of paragraph 4, and

(b) underlying subject matter other than that referred to in paragraph (a).

(3) Where this paragraph applies to a relevant contract of a company, it shall be treated for the purposes of the Corporation Tax Acts as if it were two separate contracts, namely—

(a) a relevant contract of the company whose underlying subject matter consists of the excluded types of property referred to in sub-paragraph (2)(a), and

(b) a relevant contract of the company whose underlying subject matter consists of the underlying subject matter referred to in sub-paragraph (2)(b).

(4) For the purposes of giving effect to sub-paragraph (3) all such apportionments as are just and reasonable shall be made.

(5) This paragraph does not apply to a relevant contract if it is determined in accordance with paragraph 9 that the underlying subject matter of the relevant contract in question is to be treated as consisting wholly of any one or more of the excluded types of property referred to in sub-paragraph (2)(a).

Textual Amendments

F286 Words in Sch. 26 para. 46(2)(a) substituted (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), 19

F287 47 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Textual Amendments

F287 Sch. 26 para. 47 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), 17

F288 48 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Textual Amendments

F288 Sch. 26 para. 48 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), 20

F289 48A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Textual Amendments

F289 Sch. 26 para. 48A 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), 23

Partnerships involving companies U.K.

49 (1) This paragraph applies where—

(a) a trade, profession or business is carried on by persons in partnership (“the firm”);

(b) any of those persons is a company (a “company partner”); and

(c) the firm is party to a contract which is a derivative contract or would be a derivative contract if the firm were a company.

(2) In any such case—

(a) in computing the profits and losses of the trade, profession or business for the purposes of corporation tax in accordance with section 114(1) of the Taxes Act 1988 (computation as if the partnership were a company) no credits or debits shall be brought into account under this Schedule in respect of the contract; but

(b) credits and debits shall be brought into account under this Schedule in respect of the contract in accordance with the following provisions of this paragraph by each company partner for each of its accounting periods in which the conditions in sub-paragraph (1) are satisfied.

(3) The credits and debits to be brought into account as mentioned in sub-paragraph (2)(b) shall be determined separately in the case of each company partner.

(4) For the purpose of determining those credits and debits in the case of any particular company partner—

(a) the contract entered into or acquired by the firm shall be treated as if it were instead entered into or acquired by that company partner, for the purposes of the trade, profession or business which that company partner carries on,

(b) anything done by or in relation to the firm in connection with the contract shall be treated as done by or in relation to the company partner, and

[F290 (c) to the extent that any exchange gains or losses arising from the contract are recognised in the firm’s statement of recognised gains and losses or statement of changes in equity, the exchange gains or losses shall to that extent be treated as if they had been recognised in the corresponding statement of the company partner,]

and credits and debits (the “gross credits and debits”) shall be determined accordingly.

(5) The credits and debits to be brought into account under this Schedule pursuant to sub-paragraph (2)(b) in the case of any particular company partner shall be that company partner’s appropriate share of the gross credits and debits determined in accordance with sub-paragraph (4) in the case of that company partner.

(6) For the purposes of sub-paragraph (5), the “appropriate share”, in the case of a company partner, is the share that would be apportioned to that company partner if—

(a) the gross credits and debits determined in accordance with sub-paragraph (4) in the case of that company partner fell to be apportioned between the partners; and

(b) the apportionment fell to be made in the shares in which any profit or loss computed in accordance with subsection (1) of section 114 of the Taxes Act 1988 would be apportioned between them under subsection (2) of that section.

Textual Amendments

F290 Sch. 26 para. 49(4)(c) substituted (with effect in accordance with s. 52(3) of the amending Act) by Finance Act 2004 (c. 12), Sch. 10 para. 65

Partnerships involving companies: use of fair value accounting U.K.

[F291 50 (1) Where the company partner uses fair value accounting in relation to its interest in the firm, the debits and credits to be brought into account under paragraph 49 by that company must be determined on the basis of fair value accounting.

(2) In this paragraph “company partner” and “firm” have the same meaning as in paragraph 49.]

Textual Amendments

F291 Sch. 26 para. 50 substituted (with effect in accordance with s. 52(3) of the amending Act) by Finance Act 2004 (c. 12), Sch. 10 para. 66

Adjustment on company changing to international accounting standards U.K.

[F292 50A [F293 (1) This paragraph applies where—

(a) there is a change of accounting policy in drawing up a company’s accounts from one period of account (the “earlier period”) to the next (the “later period”), and

(b) the approach in each of those periods accorded with the law and practice applicable in relation to that period.

(1A) This paragraph applies, in particular, where—

(a) the company prepares accounts for the earlier period in accordance with UK generally accepted accounting practice and for the later period in accordance with international accounting standards, or

(b) the company prepares accounts for the earlier period in accordance with international accounting standards and for the later period in accordance with UK generally accepted accounting practice. ]

(2) For the purposes of this paragraph the “carrying value” of a contract includes amounts recognised for accounting purposes in relation to the contract in respect of— If there is a difference between—

(a) the accounting value of a derivative contract of the company at the end of the earlier period, and

(b) the accounting value of that contract at the beginning of the later period,

a corresponding debit or credit (as the case may be) shall be brought into account for the purposes of this Schedule in the later period.

(3) In sub-paragraph (2) “accounting value” means [F294 subject to paragraph (3B),] the carrying value of the contract recognised for accounting purposes.

[F295 (3A) For the purposes of this paragraph the “carrying value” of a contract includes amounts recognised for accounting purposes in relation to the contract in respect of—

(a) accrued amounts;

(b) amounts paid or received in advance;

(c) mpairment losses (including provisions for bad or doubtful debts).

(3B) In determining the profits, gains and losses to be recognised in determining the carrying value of the contract for the purposes of this paragraph, the following provisions—

(a) section 94A(2) of the Finance Act 1996(2) (loan relationships with embedded derivatives), and

(b) [F296 paragraph 28] of this Schedule

apply as they apply for the purposes of determining the credits and debits to be brought into account under this Schedule.

(3C) Where—

(a) a company has ceased to be a party to a derivative contract,

(b) paragraph 53(3) of this Schedule (credits and debits to be brought into account in respect of profits and losses arising in the cessation period) applied to the cessation, and

(c) there is a difference between—

(i) the amount outstanding in respect of the derivative contract at the end of the earlier period, and

(i) the amount outstanding in respect of the derivative contract at the beginning of the later period,

a debit or credit (as the case may be) corresponding to that difference shall be treated as a debit or credit falling within sub-paragraph (2).

(3D) In sub-paragraph (3C), “the amount outstanding”, in respect of a derivative contract, means so much of the amount recognised as deferred income or deferred loss in the company’s balance sheet, in accordance with generally accepted accounting practice, in respect of the profits, gains or losses that arose from that relationship or a related transaction in the cessation period (within the meaning of section 103(6)) as has not been represented by debits or credits brought into account under this Schedule.]

F297 (4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

[F298 (5) This paragraph does not apply if or to the extent that such a debit or credit as is mentioned in sub-paragraph (2) falls to be brought into account apart from this paragraph]]

Textual Amendments

F292 Sch. 26 para. 50A inserted (with effect in accordance with s. 52(3) of the amending Act) by Finance Act 2004 (c. 12), Sch. 10 para. 67

F293 Sch. 26 para. 50A(1)(1A) substituted for Sch. 26 para. 50A(1) (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 No. 2) Order 2004 (S.I. 2004/3270), art. 12(2)

F294 Words in Sch. 26 para. 50A(3) inserted (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 No. 2) Order 2004 (S.I. 2004/3270), art. 12(3)

F295 Sch. 26 para. 50A(3A)-(3D) inserted (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 No. 2) Order 2004 (S.I. 2004/3270), art. 12(4)

F296 Words in Sch. 26 para. 50A(3B)(b) substituted by The Finance Act 2002, Schedule 26, (Parts 2 and 9) (Amendment) Order 2006 (S.I. 2006/3269), art. 28

F297 Sch. 26 para. 50A(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 No. 2) Order 2004 (S.I. 2004/3270), art. 12(5)

F298 Sch. 26 para. 50A(5) inserted (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 No. 2) Order 2004 (S.I. 2004/3270), art. 12(6)

Modifications etc. (not altering text)

C20 Sch. 26 para. 50A applied by 2005 c. 22, Sch. 6, para. 7(6)

Prevention of deduction of tax U.K.

[F299 51 See section 980 of ITA 2007 (derivative contracts: exception from duties to deduct).]

Textual Amendments

F299 Sch. 26 para. 51 substituted (6.4.2007) by Income Tax Act 2007 (c. 3), s. 1034(1), Sch. 1 para. 422(6) (with Sch. 2)

Part 10 U.K. Interpretation

Statutory accounts U.K.

F300 52 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Textual Amendments

F300 Sch. 26 para. 52 repealed (with effect in accordance with s. 52(3) of the amending Act) by Finance Act 2004 (c. 12), Sch. 10 para. 68, Sch. 42 Pt. 2(6)

Derivative and relevant contracts of person U.K.

53 (1) For the purposes of this Schedule references to a relevant contract of a person are references to a relevant contract entered into or acquired by a person; and references to a person’s being party to a relevant contract shall be construed accordingly.

(2) For the purposes of sub-paragraph (1), a relevant contract is acquired by a person if that person becomes entitled to the rights, and subject to the liabilities, under the relevant contract whether by assignment or otherwise.

(3) Where—

(a) a company ceases to be party to a derivative contract in an accounting period (the “cessation period”),

(b) profits or losses arise to the company from the derivative contract or a related transaction in the cessation period, and

(c) the credits or debits brought into account for the purposes of this Schedule for the cessation period do not include credits or debits which represent the whole of those profits or losses,

credits or debits in respect of so much of those profits or losses as are not represented by credits or debits brought into account for the cessation period shall continue to be brought into account under this Schedule over one or more subsequent accounting periods (“post-cessation periods”) as in the case of a derivative contract to which the company is party in those periods and sub-paragraphs (4) and (5) shall apply.

(4) In any case falling within sub-paragraph (3), any question—

(a) whether, in a post-cessation period, the company is, or is to any extent, party to the contract for the purposes of a trade carried on by it, or

(b) whether, in a post-cessation period, the contract is to any extent referable to a particular business, or a particular class, category or description of business, carried on by the company,

shall be determined by reference to the circumstances immediately before the company ceased to be party to the contract instead of the circumstances in the post-cessation period.

(5) In any case falling within sub-paragraph (3), any question—

(a) whether the contract has to any extent a particular purpose in a post-cessation period, or

(b) whether there is a connection between the company and any other person for a post-cessation period,

shall be determined by reference to the circumstances in the cessation period instead of the circumstances in the post-cessation period.

(6) For the purposes of the Corporation Tax Acts references to a person’s derivative contracts and to a person’s being party to a derivative contract shall be construed accordingly.

General interpretation U.K.

54 (1) In this Schedule—

• F301 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

• “bank” means any of the following—

  (a)

  the Bank of England;

  (b)

  any person falling within section 840A(1)(b) of the Taxes Act 1988; and

  (c)

  any firm falling within section 840A(1)(c) of that Act;

• [F302 “carrying value” in relation to a contract, shall be construed in accordance with sub-paragraphs (3A) and (3B) of paragraph 50A;]

• “contract for differences” shall be construed in accordance with paragraph 12;

• “contract of insurance” has the meaning given by Article 3(1) of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (S.I. 2001/544);

• [F303 “creditor relationship” has the meaning given by section 103(1) of the Finance Act 1996;

• “debtor relationship” has the meaning given by section 103(1) of the Finance Act 1996;]

• “derivative contract” shall be construed in accordance with paragraph 2;

• F304 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

• “exchange gain” and “exchange loss” shall be construed in accordance with sub-paragraphs (2) [F305 , (2A)] and (3);

• [F306 “fair value” , in relation to a derivative contract of a company, means the amount which, at the time as at which the value falls to be determined, is the amount that the company would obtain from or, as the case may be, would have to pay to an independent person for—

  (a)

  the transfer of all the company’s rights under the contract F307 ..., and

  (b)

  the release of all the company’s liabilities under the contract F307 ...;

• “fair value accounting” means a basis of accounting under which assets and liabilities are shown in the company’s balance sheet at their fair value;]

• “future” has the meaning given by paragraph 12;

• [F302 “hybrid derivative” shall be construed in accordance with paragraph 2B;]

• F308 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

• “intangible fixed assets” has the meaning given by paragraph 12;

• “investment trust” is a company approved for the purposes of section 842 of the Taxes Act 1988 (investment trusts) for an accounting period;

• F308 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

• F308 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

• [F302 “nested derivative” shall be construed in accordance with paragraph 2B(1)(b)(i);]

• “non-life mutual business” means any mutual trading, or any mutual insurance or other mutual business, which (in either case) is not life assurance business;

• [F309 “open-ended investment company” has the meaning given by section 468A(2) of the Taxes Act 1988;]

• “option” has the meaning given by paragraph 12;

• [F302 “plain vanilla contract” shall be construed in accordance with paragraph 2(2B);]

• [F302 “quasi-derivative host contract” shall be construed in accordance with paragraph 2B(1)(b)(ii);]

• “related transaction” has the meaning given by paragraph 15;

• “relevant contract” has the meaning given by paragraph 2;

• “shares”, in relation to a company, has (except in paragraphs 39 and 40) the meaning given by paragraph 2;

• [F302 “TCGA 1992” means the Taxation of Chargeable Gains Act 1992.]

• F310 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

• “UK company” means a company incorporated or formed under the law of a part of the United Kingdom;

• “underlying subject matter” has the meaning given by paragraph 11;

• “warrant” has the meaning given by paragraph 12.

(2) References in this Schedule to exchange gains or exchange losses, in the case of any company, are references respectively to—

(a) profits or gains, or

(b) losses,

which arise as a result of comparing at different times the expression in one currency of the whole or some part of the valuation put by the company in another currency on an asset or liability of the company.

If the result of such a comparison is that neither an exchange gain nor an exchange loss arises, then for the purposes of this Schedule an exchange gain of nil shall be taken to arise in the case of that comparison.

[F311 (2A) The Treasury may make provision by regulations as to the manner in which—

(a) exchange gains or losses, and

(b) any other profits or gains or losses,

are to be calculated for the purposes of sub-paragraph (2) in a case where fair value accounting is used by the company.

Any such regulations may be made so as to apply to periods of account beginning before the regulations are made, but not earlier than the beginning of the calendar year in which they are made.]

(3) A reference to an exchange gain or loss from a company’s derivative contract is a reference to an exchange gain or loss arising to a company in relation to a derivative contract of the company.

(4) In this Schedule “financial trader” means—

(a) any person who—

(i) falls within section 31(1)(a), (b) or (c) of the Financial Services and Markets Act 2000 (c. 8), and

(ii) has permission under that Act to carry on one or more of the activities specified in Article 14 and, in so far as it applies to that Article, Article 64 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (S.I. 2001/544); or

(b) any person not falling within paragraph (a) who is approved by the Board for the purposes of this paragraph.

Textual Amendments

F301 Words in Sch. 26 para. 54(1) repealed (with effect in accordance with s. 52(3) of the amending Act) by Finance Act 2004 (c. 12), Sch. 10 para. 69(a), Sch. 42 Pt. 2(6)

F302 Words in Sch. 26 para. 54(1) 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, 29(2)

F303 Words in Sch. 26 para. 54(1) 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 2004 (S.I. 2004/2201), arts. 1(1), 19(2)

F304 Words in Sch. 26 para. 54(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, 29(3)

F305 Word in Sch. 26 para. 54(1) inserted (retrospective to 7.4.2005) by Finance (No. 2) Act 2005 (c. 22), Sch. 6 para. 4(5)(6)

F306 Words in Sch. 26 para. 54(1) substituted (with effect in accordance with s. 52(3) of the amending Act) by Finance Act 2004 (c. 12), Sch. 10 para. 69(b)

F307 Words in Sch. 26 para. 54(1) repealed (with effect in accordance with Sch. 6 para. 24(3)(4) of the amending Act) by Finance Act 2006 (c. 25), Sch. 6 para. 24(2), Sch. 26 Pt. 3(12)

F308 Words in Sch. 26 para. 54(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)(iii), Sch. 27 Pt. 2(10)

F309 Words in Sch. 26 para. 54(1) 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, 15

F310 Words in Sch. 26 para. 54(1) repealed (with effect in accordance with s. 52(3) of the amending Act) by Finance Act 2004 (c. 12), Sch. 10 para. 69(c), Sch. 42 Pt. 2(6)

F311 Sch. 26 para. 54(2A) substituted (20.7.2005) by Finance (No. 2) Act 2005 (c. 22), Sch. 6 para. 11