CFM13126 - Taxing derivative contracts: underlying subject matter: Paras 4B and 4C

Transitional provisions where Para 4A does not apply

Para 4A does not exhaust the circumstances in which an equity derivative, previously a chargeable asset, might move into Sch 26 for the first time.

• A company might hold the contract on 16 March 2005, but 16 March may fall within an “old” accounting period – one beginning before 1 January 2005.
• A company may have a period of account that begins before 1 January 2005, but acquire an equity derivative after 16 March.

In both of these cases, the equity derivative would – in the absence of any special provision – become a derivative contract at the start of the company’s next period of account. Paras 4B and 4C bring the transition forward to an earlier date. They came into force on 28 July 2005 – having been introduced by SI 2005/2082, laid on 27 July 2005 – and apply to periods of account ending on or after 28 July.

Para 4B deals with the situation in the first of the bullet points above. It applies where

• a company holds a relevant contract both immediately before and on 28 July 2005, but the contract was a chargeable asset rather than a derivative contract before that date (because 28 July 2005 falls into a period of account beginning before 1 January 2005); but
• if a new accounting period had begun on 28 July, the contract would be a derivative contract.

Where the conditions are met, the contract is treated as having been disposed of, and immediately reacquired, on 28 July 2005, for a consideration equal to its fair value on that date. The chargeable gain or allowable loss on disposal is brought into account when the company ceases to be party to the contract.

Para 4C applies where the company only acquires the relevant contract on or after 28 July 2005, but it is not (apart from Para 4C) a derivative contract on acquisition, because the acquisition occurs in a period beginning before 1 January 2005. In this case, Para 4C treats it as being a derivative contract from the date of acquisition. Thus there is no transition from capital gains rules to the derivative contracts regime, and therefore no need for any deemed disposal.

Examples illustrating paragraphs 4B and 4C are at CFM13126a.