Ibvan Ltd trades as a confectionery manufacturer. It regularly
enters into forward contracts to buy sugar, with the price being
fixed at the time of contract for delivery in six months' time. The
amounts payable under such contracts are included in cost of sales
in the company's accounts.
For accounting periods beginning before 1 October 2002, the
amount of Ibvan Ltd's sugar purchases is allowed as a Case I
deduction under the ordinary rules of Schedule D.
For accounting periods beginning on or after 1 October 2002,
the forward contracts are derivative contracts. They fall within
the definition of a future in Para 12(6) and, because of the
special provision in Para 3(2)(a), the accounting exclusion does
not apply. Nor are they excluded by the underlying subject matter
test in Para 4 - see
CFM13094 onwards.
Since the company (in a period of account beginning before 1
January 2005) is accounting for the contracts on an authorised
accruals basis, the tax treatment of the contracts will simply
follow the accounts. And because the company has entered into the
contracts for the purposes of its trade, the debits given by the
derivative contract rules will be brought into account as Case I
deductions. So the tax treatment of the forward contracts remains
unchanged.
If, in a period of account beginning on or after 1 January
2005, the company has adopted FRS 25 and FRS 26, it is likely that
– if the contract provides only for the physical delivery of
sugar – it will not be treated as a derivative for accounting
purposes (and thus it will not be carried at fair value). Para
3(2)(a) will continue to apply, and for tax purposes it remains a
derivative contract. Debits or credits will follow the accounts
– in practice, there will be no change of tax treatment.
