CFM50040 - Derivative contracts: introduction: how profits and losses are charged

Bringing credits or debits into account

The basic rule is that all profits from a company’s derivative contracts are charged as income (CTA09/S571). Traditional distinctions between ‘capital’ and ‘revenue’ are irrelevant.

There are, however, exceptions to this general rule where derivatives have shares or property as their subject matter. In some cases, profits from such derivatives are brought into account as chargeable gains. There is detailed guidance at CFM55000 onwards.

Bringing amounts into account

Except for the minority of cases where chargeable gains treatment applies, profits (‘credits’) and losses (‘debits’) on derivative contracts are brought into account in exactly the same way as credits and debits on loan relationships (see CFM30160).

Where a company is party to a derivative contract for the purposes of a trade it carries on, the credits and debits are treated respectively as trading receipts and trading expenses taxed under CTA09/PT3. In other cases, they are treated as non-trading loan relationship credits or debits and form part of the company’s non-trading profits or deficit from its loan relationships for the accounting period under CTA09/PT5.

The profits of a property business within the scope of Corporation Tax are to be computed without regard to items giving rise to credits or debits within CTA09/PT5 or PT7. Thus amounts in respect of derivative contracts will give rise to non-trading amounts taken into account under CTA09/PT5.

The distinction between trading and non-trading derivative contracts is covered in more detail at CFM51030.