Finance Act 2002

Derivatives not embedded in a loan relationship U.K.

[F1 45L. [F2 (1) This paragraph applies where—

(a) a company is party to a non-financial embedded derivative or a nested derivative (“the contract”),]

[F3 (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[F4 , and

(c) no election having effect in relation to the derivative contract is or has been made under sub-paragraph (2A),]

F5 ...

[F6 [F7 (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 [F8 whether that contract is a hybrid derivative or a non-financial contract] .

(1C) If the original contract is [F9 a hybrid derivative], profits and losses are to be computed for the purposes of this Schedule as if that contract—

[F10 (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) [F11 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—

[F12 (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.

[F13 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).]

[F14 (2A) A company may elect that this paragraph is not to apply to any of its contracts [F15 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

F1 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

F2 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)

F3 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)

F4 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)

F5 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)

F6 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)

F7 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)

F8 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)

F9 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)

F10 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)

F11 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)

F12 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)

F13 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)

F14 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)

F15 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)