CFM13275a - Taxing derivative
contracts: hedging: hedging relationship - enquiries
Hedging relationship - enquiries
This guidance applies to periods of account beginning on or
after 1 January 2005
It is the company’s responsibility in preparing its
CTSA return and tax computations to apply the Disregard Regulations
where appropriate. HMRC staff should not normally need to make
detailed enquiries about whether a hedging relationship exists in
transactions where the regulations have been applied, or try to
argue that the derivative is in fact hedging some other asset,
liability or forecast transaction.
Enquiries may be appropriate where:
- It appears that the company’s
policies have not been adhered to, for example it is claimed that
interest rate risk in relation to a particular borrowing is
unhedged, when the company’s risk management policy is to
hedge all such transactions.
- It is claimed that no hedging relationship
exists between a particular derivative and an asset or liability,
despite clear objective correlations (for example in principal
amount, date on which the transactions were entered into, maturity
date, and so on).
- The Disregard Regulations are applied
inconsistently – it is claimed that no hedging relationship
exists in year 2 when it existed in year 1 (or vice versa),
although there have been no changes in the instruments
concerned.
- The company’s return discloses use
of a financial avoidance scheme, or there is reason to believe that
the derivative transactions may be part of tax avoidance
arrangements.
- The accounts reflect significant losses on
derivative contracts, but the nature of the company’s
activities is not such that it is considered likely to enter into
such contracts speculatively.
A company’s intention in becoming party to a derivative
contract is a question of fact. HMRC staff should, in any case
where it is unclear whether or not a hedging relationship exists,
have regard to all the available evidence. This may include:
- any contemporaneous documentation of the
company’s intentions in undertaking the transaction,
including (but not limited to) board minutes, internal memos and
communications with external parties,
- accounting entries, and supporting
documentation (for example, hedge effectiveness computations),
and
- oral evidence from the people involved in
the transactions.
