12.—(1) Amend paragraph 45L (derivative not embedded in a loan relationship)(1) as follows.
(2) In sub-paragraph (1)—
(a)for “Where” substitute “This paragraph applies where”;
(b)in paragraph (a) for “a relevant contract” substitute “an embedded derivative contract”; and
(c)omit the words following paragraph (c).
(3) For sub-paragraph (2) substitute—
“(1A) In this paragraph “the original contract” means the contract mentioned in paragraph 2(3) to which the company is party and as a result of which the company falls to be treated by virtue of paragraph 2(4) as a party to the derivative contract.
(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 whether or not that contract is a derivative contract.
(1C) If the original contract is a derivative contract, profits and losses are to be computed for the purposes of this Schedule as if that contract—
(a)were not one where the rights and liabilities are treated as divided as mentioned in paragraph 2(3), and
(b)were not one in relation to which a fair value basis of accounting is used.
(2) If the original contract is not a derivative 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—
(a)were not one where the rights and liabilities are treated as divided as mentioned in paragraph 2(3), and
(b)were not one in relation to which a fair value basis of accounting is used.
This sub-paragraph has effect notwithstanding paragraph 1(2).”.
(4) At the end of sub-paragraph (2A)(2) add—
“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.”.