OT22111 - Interest and Financing

Swaps and other Hedging Instruments. Post 1993

Under the general post FA93 rules, companies can elect to set non trading exchange and Financial Instrument losses against the total profits of the company (FA93/s131(4)). Following FA96 claims are made under FA96/s83.

FA94 provided a comprehensive set of rules for a range of financial instruments used to hedge interest rate or currency risk. The rules apply for the first accounting period beginning on or after 23 March 1995. Broadly the legislation provides for income treatment for qualifying contracts and for profits and losses to be computed on either an accruals or mark to market basis. For more detail see the guidance on foreign exchange and financial instruments in the CT manual.

The rules in FA94 were extended in FA96 to cover debt contracts and options for example on gilts or other corporate securities. The FA96 rules apply generally from 1 April 1996 onwards.

Where financial instruments which are within FA94 (as extended by FA96) and are held for trading purposes then profits or losses are simply brought into account in computing trading profits. If they are held for non-trading purposes then relief is available by treating profits or losses as debits or credits to be brought to account under FA96/s82and 83. This means that profits or losses are merged with non-trading profits or losses on loan relationships or non- trading exchange differences. Any net profit is assessed under the new Case III of Schedule D. Any net loss is available for relief under FA96/s83 which provides for relief in the following ways

• against corporation tax profits of the period
• by way of surrender as group relief
• by carry -back against similar non-trading profits of the 3 preceding periods or
• by carry-forward against any non-trading profits in subsequent periods.

But the set off of non trade losses is not available against the ring fence profits of an oil company (FA93/s133(2) as extended to Financial Instruments by FA94/s160(2) - FA96/Sch8/para1(4) following FA96.

There are still some financial instruments not covered by FA94 as extended by FA96. These are principally equity based and commodity based financial instruments. These remain subject to the previous rules described in OT22110.