Consolidated parts 2 and 9

Part 2

Derivative contracts

Derivative contracts and relevant contracts

2 - (1) For the purposes of the Corporation Tax Acts, a company’s derivative contracts are those of its relevant contracts -

(a) which satisfy any of the conditions in paragraphs (a) to (c) of paragraph 3(1), and

(b) which are not prevented from being derivative contracts by paragraph 4 or any other provision of the Corporation Tax Acts.

(2) For the purposes of this Schedule a “relevant contract” is -

(a) an option,

(b) a future, or

(3) Sub-paragraph (4) applies where a company, in accordance with generally accepted accounting practice, treats rights and liabilities under a contract to which it is party and which is not a loan relationship, as divided between-

(a) rights and liabilities under one or more derivative financial instruments ("embedded derivatives"), and

(b) the remaining rights and liabilities (the "host contract").

(4) The company shall be treated for the purposes of this Schedule as -

(a) party to a relevant contract whose rights and liabilities consist only of those of the embedded derivative, or

(b) if there is more than one embedded derivative, party to relevant contracts each of whose rights and liabilities consist only of those of one of the embedded derivatives.

(5) Each relevant contract to which the company is treated as party under sub-paragraph (4) (an “embedded derivative contract”) shall be treated as an option, a future or a contract for differences according to whether the rights and liabilities of the embedded derivative would be of that character if contained in a separate contract.
Words in bold in sub-paragraph (4) substituted by SI 2005/2082 in relation to periods of account ending on or after 16th March 2005 – previously “Schedule 26”

Words in bold in sub-paragraph (5) inserted by SI 2005/3440 in relation to periods of account ending on 31st December 2005 only

Contracts to satisfy accounting requirements etc

3 - (1) A relevant contract is not a derivative contract for the purposes of this Schedule for any accounting period unless -

(a) it is treated for accounting purposes as a derivative financial instrument,

(b) it is a relevant contract which -

(i) does not fall within paragraph (a) solely because it does not meet the requirement in paragraph 9(b) of Financial Reporting Standard 26 issued in December 2004 by the Accounting Standards Board, but

(ii) is treated for accounting purposes as, or as forming part of, a financial asset or liability, or

(c) in the case of a relevant contract which does not fall within paragraph (a) or (b), it falls within sub-paragraph (2).

(2) A relevant contract falls within this sub-paragraph if -

(a) its underlying subject matter is commodities, or

(b) it is a contract for differences whose underlying subject matter is -

(i) land (wherever situated),

(ii) tangible movable property, other than commodities which are tangible assets,

(iii) intangible fixed assets,

(iv) weather conditions, and

(v) creditworthiness.

(3) For the purposes of sub-paragraph (1)(a), a relevant contract of a company is treated for accounting purposes as a derivative financial instrument for an accounting period if, for that accounting period, it is so treated for the purposes of the relevant accounting standard used by the company for that accounting period (or would be so treated if the company were a company which used a relevant accounting standard in respect of the relevant contract).

(4) For the purposes of sub-paragraph (1)(b), a relevant contract of a company is treated for accounting purposes as, or as forming part of, a financial asset or liability for an accounting period, if, for that accounting period, it is so treated for the purposes of the relevant accounting standard used by the company for that accounting period (or would be so treated if the company were a company which used a relevant accounting standard in respect of the relevant contract).

(5) In this paragraph “relevant accounting standard” means -

(a) in relation to any accounting period beginning before 1st January 2005 for which it is required or permitted to be used by the company, Financial Reporting Standard 13 issued in September 1998 by the Accounting Standards Board, as it has effect for periods of account ending on 31st December 2002, or

(aa) in relation to any accounting period beginning on or after 1st January 2005, Financial Reporting Standard 25 issued in December 2004 by the Accounting Standards Board, as it has effect for periods of account beginning on or after 1st January 2005, or

(b) in relation to any accounting period for which it is required or permitted to be used by the company, any subsequent accounting standard dealing with transactions which are derivative financial instruments under Financial Reporting Standard 25, as from time to time amended.

Words in bold in sub-paragraph (4) have effect in relation to periods of account beginning on or after 1st January 2005 and ending on or before 16th March 2005 and on or after 17th August 2005.

Words in bold in sub-paragraphs (3) and (5) inserted by SI 2005/2082 in relation to periods of account ending on or after 17th August 2005

Contracts excluded by virtue of their underlying subject matter

4 - 1) A relevant contract is not a derivative contract for the purposes of this Schedule if its underlying subject matter consists wholly of any one or more of the excluded types of property or is treated as consisting wholly of such property.

(2) For the purposes of this paragraph the excluded types of property are -

(a) in relation to an option or future, intangible fixed assets; and

(b) in relation to relevant contracts in the circumstances specified in paragraphs (2A), (2B), (2C) or (2D) -

(i) shares in a company (other than shares excluded by sub-paragraph (2ZA), or

(ii) rights of a unit holder under a unit trust scheme other than a scheme to which paragraph 4 of Schedule 10 to the Finance Act 1996 applies.

(2ZA) The shares excluded by this sub-paragraph are -

(a) shares in relation to which section 91A or 91B of the Finance Act 1996 has effect;

(b) shares in an open-ended investment company to which paragraph 4 of Schedule 10 to the Finance Act 1996 applies.

(2A) The circumstances specified in this paragraph are -

(a) the relevant contract is entered into by a company carrying on life assurance business.

(2B) The circumstances specified in this paragraph are -

(a) the relevant contract is entered into or acquired by the company otherwise than for the purposes of a trade carried on by it or the company is a mutual trading company, …

(b) there is a hedging relationship between the contract and -

(i) the asset of the company which consists of shares or rights of a unit holder under a unit trust scheme, or

(ii) any share capital of the company, and

(c) the relevant contract is not an embedded derivative to which the company is treated as party by section 94A(2)(b) of the Finance Act 1996.

(2C) The conditions specified in this paragraph are -

(a) the relevant contract is entered into or acquired -

(i) otherwise than for the purposes of a trade carried on by it or the company is a mutual trading company; or

(ii) for the purposes of life assurance;

(b) the relevant contract is a quoted option to subscribe for shares in a company.

(2D) The conditions specified in this sub-paragraph are -

(a) the company that holds the relevant contract has a hedging relationship between -

(i) the relevant contract, and

(ii) an asset or liability representing a loan relationship which is treated as mentioned in section 94A(1) of the Finance Act 1996, and

(b) each relevant contract to which the company is treated as party under section 94A(2)(b) in the case of that loan relationship is a derivative contract to which paragraph 45D, 45F, 45FA, 45J or 45K applies.

(4) Paragraph 9 applies for the purpose of determining whether the underlying subject matter of a relevant contract is to be treated as consisting wholly of any one or more of the excluded types of property.

Words in bold (apart from those in sub-paragraph (2)(b)(i), (2B)(b)(ii) and (2D)(a)(ii) and sub-paragraph (2ZA)) substituted by SI 2005/2082 in relation to periods of account beginning on or after 1st January 2005 and ending on or after 16th March 2005.

Words in bold in sub-paragraph (2)(b)(i), (2B)(b)(ii) and (2D)(a)(ii) and sub-paragraph (2ZA) substituted or inserted by SI 2005/3440 in relation only to periods of account ending on 31st December 2005.

Paragraph 4(2) and (2A) to (2D) (apart from the words in bold) have effect in relation to periods of account beginning on or after 1st January 2005 and ending on or after 16th March 2005

Contracts which become derivative contracts: chargeable assets

4A.—(1) This paragraph applies to a company if the conditions in sub-paragraph (2) are satisfied in relation to a relevant contract.

(2) The conditions are -

(b) the company is a party to the relevant contract both immediately before and at 3.00p.m. on 16th March 2005;

(c) the relevant contract -

(i) was not a derivative contract immediately before 3.00p.m. on 16th March 2005, but

(ii) as from that time is a derivative contract; and

(d) the relevant contract was, immediately before 3.00p.m. on 16th March 2005, a chargeable asset.

(3) Where this paragraph applies, the company shall, when it ceases to be a party to the contract, bring into account, for the accounting period in which it ceased to be a party to the contract, the amount of any chargeable gain or allowable loss which would have been treated as accruing to the company on the assumption -

(a) that it had made a disposal of the asset immediately before 3.00p.m. on 16th March 2005, and

(b) that the disposal had been for a consideration equal to the value (if any) given to the contract in the accounts of the company at the end of the company’s accounting period immediately before its first new period.

(4) For the purposes of this paragraph an asset is a chargeable asset if any gain accruing on the disposal of the asset by the company would be a chargeable gain for the purposes of the Taxation of Chargeable Gains Act 1992 (and includes any obligations under futures contracts which, by virtue of section 143 of that Act, are regarded as assets to the disposal of which that Act applies.

Paragraph inserted by SI 2005/646 in relation to periods of account beginning on or after 1st January 2005 and ending on or after 16th March 2005

4B.—(1) This paragraph applies to a company if the conditions in sub-paragraph (2) are satisfied in relation to a relevant contract.

(2) The conditions are -

(a) the company is a party to the relevant contract both immediately before and on 28th July 2005,

(b) the relevant contract -

(i) was not a derivative contract immediately before that date, but

(ii) would (apart from this paragraph) be a derivative contract on that date, if an accounting period of the company began on that date, and

(c) the relevant contract was a chargeable asset immediately before that date.

(3) The company shall, when it ceases to be a party to the relevant contract, bring into account, for the accounting period in which it ceased to be a party to the contract, the amount of any chargeable gain or allowable loss which would have been treated as accruing to the company on the assumption -

(a) that it had made a disposal of the relevant contract immediately before <date>, and

(b) that the disposal had been for a consideration equal to the fair value of the relevant contract on that date.

(4) The relevant contract shall be treated for the purposes of this Schedule as a derivative contract entered into by the company on 28th July 2005 for a consideration equal to the fair value of the contract on that date.

(5) Sub-paragraph (4) of paragraph 4A (meaning of chargeable asset) also applies for the purposes of this paragraph.

4C - 1) This paragraph applies to a company if the conditions in sub-paragraph (2) are satisfied in relation to a relevant contract to which it becomes a party on or after 28th July 2005.

(2) The conditions are that (apart from this paragraph) the relevant contract -

(a) is not a derivative contract on the date on which the company becomes a party to it, but

(b) would be a derivative contract on that date, if an accounting period of the company began on that date, and

(c) is a chargeable asset when the company becomes a party to it.

(3) The relevant contract shall be treated for the purposes of this Schedule as a derivative contract on and after that date.

(4) Sub-paragraph (4) of paragraph 4A (meaning of chargeable asset) also applies for the purposes of this paragraph.

Paragraphs 4B and 4C come into force on 28th July 2005, and have effect in relation to periods of account ending on or after that day.

Paragraphs 5, 5A, 6, 7 and 8 repealed by the Finance Act 2002, Schedule 26, Parts 2 and 9 (Amendment) Order, SI 2005/646 arts 2, 6 with effect from 3pm on 16 March 2005. The repeals have effect in relation to periods of account beginning on or after 1 January 2005, and ending on or after 16 March 2005.

Underlying subject matter which is subordinate or of small value disregarded

9 - (1) This paragraph applies in relation to a relevant contract which falls within sub-paragraph (2) or sub-paragraph (4).

(2) A relevant contract falls within this sub-paragraph if its underlying subject matter consists of -

(a) any one or more of the excluded types of property falling within paragraphs (a) or (b) of sub-paragraph (2) of paragraph 4, and

(b) other underlying subject matter which is -

(i) subordinate in relation to any of the property referred to in paragraph (a), or

(ii) of small value in comparison with the value of the underlying subject matter as a whole.

(4) A relevant contract falls within this sub-paragraph if its underlying subject matter consists of -

(a) any one or more of the excluded types of property falling within paragraph (b) of sub-paragraph (2) of paragraph 4, and

(b) other underlying subject matter which is -

(i) subordinate in relation to any of the property referred to in paragraph (a), or

(ii) of small value in comparison with the value of the underlying subject matter as a whole.

(5) Where this paragraph applies in relation to a relevant contract, its underlying subject matter shall be treated for the purposes of this Schedule as if it consisted wholly of -

(a) in the case of a relevant contract falling within sub-paragraph (2), the excluded types of property referred to in paragraph (a) of that sub-paragraph, or

(c) in the case of a relevant contract falling within sub-paragraph (4), the excluded types of property referred to in paragraph (a) of that sub-paragraph.

(6) For the purposes of this paragraph whether part of the underlying subject matter of a relevant contract of a company is subordinate or of small value is to be determined by reference to the time when the company enters into or acquires the relevant contract.

Paragraph 10 repealed by the Finance Act 2002, Schedule 26, Parts 2 and 9 (Amendment) Order, SI 2005/646 arts 2, 6 with effect from 3pm on 16 March 2005. The repeals have effect in relation to periods of account beginning on or after 1 January 2005, and ending on or after 16 March 2005.

Meaning of “underlying subject matter”

11 - (1) In this Schedule references to the underlying subject matter of a relevant contract are to be construed in accordance with this paragraph.

(2) The underlying subject matter of an option is -

(a) the property which would fall to be delivered if the option were exercised, or

(b) where the property which would so fall to be delivered is a derivative contract, the underlying subject matter of that derivative contract.

(3) The underlying subject matter of a future is -

(a) the property which, if the future were to run to delivery, would fall to be delivered at the date and price agreed when the contract is made, or

(b) where the property which would so fall to be delivered is a derivative contract, the underlying subject matter of that derivative contract.

(4) The underlying subject matter of a contract for differences is -

(a) where the contract for differences relates to fluctuations in the value or price of property described in the contract, the property so described, or

(b) where an index or factor is designated in the contract for differences, the matter by reference to which the index or factor is determined.

(5) In the case of a contract for differences, its underlying subject matter may include -

(a) interest rates;

(b) weather conditions;

(6) Interest rates are not the underlying subject matter of a relevant contract in a case where, under the terms of that contract, -

(a) the date on which a party to that contract becomes subject to a duty to make a payment is a variable date, and

(b) the amount of that payment varies according to the date of payment, and the terms of the relevant contract refer to an interest rate or rates for the purpose only of establishing that amount.

(7) Where an underlying subject matter of a relevant contract is income from -

(a) land (wherever situated);

(b) shares in a company; or

the underlying subject matter shall not be treated, solely by reason of that income, as being land, or such shares or rights (as the case may be).

Words in bold substituted by SI 2005/2082 in relation to periods of account beginning on or after 1st January 2005 and ending on or after 16th March 2005.

Definition of terms relating to derivative contracts

12(1) This paragraph defines the following expressions for the purposes of this Schedule -

(a) a capital redemption policy (see sub-paragraph (2));

(b) a contract for differences (see sub-paragraphs (3) to (5));

(bza) a contract of long-term insurance (see sub-paragraph (16))

(ba) a depositary receipt, in relation to shares (see sub-paragraph (17));

(bb) designated (see sub-paragraph (13));

(cc) a hedging relationship between a relevant contract and an asset or a liability, in the case of any company (see sub-paragraph (14));

(d) intangible fixed assets (see sub-paragraph (11));

(dd) Integrated Prudential Sourcebook (see sub-paragraph (15));

(de) long-term insurance fund (see sub-paragraph (16));

(e) an option (see sub-paragraphs (8) and (10));

(f) shares in a company (see sub-paragraph (12));

(g) a warrant (see sub-paragraph (9)).

(2) A “capital redemption policy” is a contract effected in the course of capital redemption business (within the meaning of section 458 of the Taxes Act 1988).

(3) A “contract for differences” is a contract the purpose or pretended purpose of which is to make a profit or avoid a loss by reference to fluctuations in -

(a) the value or price of property described in the contract, or

(b) an index or other factor designated in the contract.

(4) For the purposes of sub-paragraph (3)(b) an index or factor may be determined by reference to any matter and, for those purposes, a numerical value may be attributed to any variation in a matter.

(5) None of the following is a contract for differences -

(a) a future;

(b) an option;

(d) a capital redemption policy;

(e) a contract of indemnity;

(f) a guarantee;

(g) a warranty;

(h) a loan relationship.

(6) A “future” is a contract for the sale of property under which delivery is to be made -

(a) at a future date agreed when the contract is made, and

(b) at a price so agreed.

(7) For the purposes of sub-paragraph (6)(b) a price is to be taken to be agreed when the contract is made -

(a) notwithstanding that it is left to be determined by reference to the price at which a contract is to be entered into on a market or exchange or could be entered into at a time and place specified in the contract; or

(b) in a case where the contract is expressed to be by reference to a standard lot and quality, notwithstanding that provision is made for a variation in the price to take account of any variation in quantity or quality on delivery.

(8) An “option” includes a warrant.

(9) A “warrant” is an instrument which entitles the holder to subscribe for shares in a company or assets representing a loan relationship of a company; and for these purposes it is immaterial whether the shares or assets to which the warrant relates exist or are identifiable.

(10) References to a future or option do not include references to a contract whose terms provide -

(a) that, after setting off their obligations to each other under the contract, a cash payment is to be made by one party to the other in respect of the excess, if any, or

(b) that each party is liable to make to the other party a cash payment in respect of all that party’s obligations to the other under the contract, and do not provide for the delivery of any property.

(11) “Intangible fixed assets” has the same meaning as in Schedule 29 to this Act; and paragraphs 73 to 76 of that Schedule (and paragraph 72 of that Schedule so far as it relates to those paragraphs) have effect for the purposes of this Part as they have effect for the purposes of that Schedule.

(12) “Share”, in relation to a company, means any share in the company under which an entitlement to receive distributions may arise; and any reference to a share includes a reference to each of the following -

(a) a depositary receipt for shares under which such an entitlement may arise;

(b) in the case of a company that has no share capital, any interests in the company possessed by members of the company;

(13) “Designated” has the same meaning as for accounting purposes.

(14) A company has a hedging relationship between a relevant contract on the one hand (“the hedging instrument”) and an asset or a liability on the other (“the hedged item”) if and to the extent that -

(a) the hedging instrument and the hedged item are designated by the company as a hedge; or

(b) in any other case the hedging instrument is intended to act as a hedge of the exposure to changes in fair value of a hedged item which is a recognised asset or liability or an identified portion of such an asset or liability that is attributable to a particular risk and could affect profit or loss of the company.

For the purposes of this sub-paragraph the liabilities of a company include its own share capital.

(15) Integrated Prudential Sourcebook” means the Integrated Prudential Sourcebook made by the Financial Services Authority under the Financial Services and Markets Act 2000.

(16) “Long-term insurance fund” and “contract of long-term insurance” have the meaning given in section 431(2) of the Taxes Act 1988.

(17) “Depositary receipt”, in relation to shares (within the meaning of this Schedule) has the same meaning as it has in Part 4 of the Finance Act 1986 in relation to shares (within the meaning of that Part).

Words in bold in sub-paragraph (1)(ba), (12) and (17) inserted by SI 2005/2082 in relation to periods of account beginning on or after 1st January 2005 and ending on or after 16th March 2005.

Words in bold in sub-paragraph (1)(bza) and (16) inserted by SI 2005/3440 in relation only to accounting periods ending on 31st December

Power to amend paragraphs 2 to 12 and Part 9

13 - (1) The Treasury may by order amend -

(a) any of paragraphs 2 to 12, or

(b) Part 9 of this Schedule.

(2) The provision that may be made by an order under this paragraph includes provision -

(a) adding to, or varying, the descriptions of contract which are derivative contracts within paragraph 2 or removing any such description of contract, or

(b) adding to, or varying, the descriptions of contracts which are excluded under paragraph 4 or removing any such description of contract.

(3) The provision that may be made under sub-paragraph (2)(b), in relation to contracts which are excluded under paragraph 4, includes provision adding to, or varying, the provisions which qualify the exclusion of contracts under that paragraph or removing any such qualifying provision.

(4) An order under this paragraph may provide for any of its provisions to have effect in relation to accounting periods ending on or after day on which order comes into force (whenever beginning).

(5) The power to make an order under this paragraph includes power -

(a) to make different provision for different cases, and

(b) to make such consequential, supplementary, incidental or transitional provisions, or savings, as appear to the Treasury to be necessary or expedient (including provision amending any enactment or any instrument made under an enactment).

Part 9

Miscellaneous

Derivative contracts ceasing to be held for purposes of trade

44 - (1)This paragraph applies where -

(a) a company is party to a relevant contract which is a derivative contract whose underlying subject matter consists, or is treated as consisting, wholly of shares or rights of a unit holder under a unit trust scheme,

(b) the company entered into or acquired the relevant contract for the purposes of a trade carried on by it,

(c) at any time (“the relevant time”) the relevant contract ceases to be held for those purposes,

(d) the company continues to be party to the relevant contract after the relevant time, and

(e) if the company had entered into or acquired the contract immediately after the relevant time, the relevant contract would not have been a derivative contract.

(2) Where this paragraph applies, the company shall be deemed -

(a) to have disposed of the relevant contract immediately before the relevant time for a consideration of an amount equal to the fair value of the contract at the relevant time, and

(b) to have reacquired it immediately after that time for the same consideration.

(3) Paragraph 9 applies for the purpose of determining whether the underlying subject matter of a relevant contract is to be treated as consisting wholly of the property referred to in sub-paragraph (1)(a).

Words in bold substituted by SI 2005/2082 in relation to periods of account beginning on or after 1st January 2005 and ending on or after 17th August 2005.

Contracts becoming held for purposes of trade

45 - (1) This paragraph applies where a relevant contract of a company -

(a) whose underlying subject matter consists, or is treated as consisting, wholly of -

(i) shares in a company, or

(ii) rights of a unit holder under a unit trust scheme,

(b) which is a chargeable asset, and

(c) which was entered into or acquired by the company otherwise than for the purposes of a trade carried on by it,
is at any time appropriated by the company for the purposes of a trade carried on by it.

(2) Where this paragraph applies -

(a) section 161 of the Taxation of Chargeable Gains Act 1992 (appropriations to and from stock) shall have effect in relation to the appropriation of that contract, but

(b) the company may not make an election under subsection (3) of that section in relation to that appropriation.

3) For the purposes of this paragraph an asset is a chargeable asset if any gain accruing on the disposal of the asset by the company would be a chargeable gain for the purposes of the Taxation of Chargeable Gains Act 1992 (and includes any obligations under futures contracts which, by virtue of section 143 of that Act, are regarded as assets to the disposal of which that Act applies).

(4) Paragraph 9 applies for the purpose of determining whether the underlying subject matter of a relevant contract is to be treated as consisting wholly of the property referred to in sub-paragraph (1)(a).

Derivative contracts which are to be taxed on a chargeable gains basis

45A. -(1) This paragraph applies to a derivative contract of a company for an accounting period if any of the following provisions applies to the derivative contract for the period -

(a) paragraph 45C (derivative contracts relating to land or certain tangible movable property);

(b) paragraph 45D (creditor relationship with embedded derivative which is an option relating to qualifying ordinary shares or mandatorily convertible preference shares);

(c) paragraph 45F (creditor relationship with embedded derivative which is an exactly tracking contract for differences whose subject matter is land or qualifying ordinary shares);

(d) paragraph 45G (property based total return swaps).

(2) Where this paragraph applies to a derivative contract for an accounting period -

(a) paragraph 14(3) (non-trading credits and debits) shall not apply to the relevant credits and debits, but

(b) sub-paragraph (4) shall apply to them instead.

(3) For the purposes of this paragraph the relevant credits and debits -

(a) in the case of a derivative contract falling within any of paragraphs (a) to (c) of sub-paragraph (1), are the credits and debits given in relation to the contract for the accounting period by paragraph 15;

(b) in the case of a derivative contract falling within paragraph (d) of that sub-paragraph, are the credits and debits described in sub-paragraph (2) of paragraph 45H.

(4) For the purposes of corporation tax on chargeable gains -

(a) if C exceeds D, a chargeable gain equal in amount to the amount of the excess shall be treated as accruing to the company in the accounting period,

(b) if D exceeds C, a loss equal in amount to the amount of the excess shall be treated as accruing to the company in the accounting period, but this is subject to sub-paragraph (6).

(5) In sub-paragraph (4) -

C means the sum of the relevant credits for the accounting period in respect of the derivative contract;

D means the sum of the relevant debits for the accounting period in respect of the derivative contract.

(6) Sub-paragraph (4) does not apply in the case of a derivative contract falling within sub-paragraph (1)(b) (embedded option) if, on the assumption that -

(a) the rights and liabilities that fall to be treated as comprised in the derivative contract by virtue of section 94A of the Finance Act 1996 (loan relationships with embedded derivatives) had been contained in a separate contract,

(b) that separate contract were an actual option,

(d) a gain accrued for the purposes of corporation tax on chargeable gains to the company on the disposal,
paragraph 2 of Schedule 7AC to the Taxation of Chargeable Gains Act 1992 (substantial shareholding exemptions: disposal of asset related to shares) would apply to that gain.

Carry back of net losses on derivative contracts to which paragraph 45A applies

45B. - (1) This paragraph applies in the case of a company if the following conditions are satisfied -

(a) there is a net amount of paragraph 45A losses (see sub-paragraph (5)(a)) for an accounting period (the “loss period”),

(b) there is a net amount of paragraph 45A gains (see sub-paragraph (5)(b)) for a previous accounting period (the “gains period”),

(c) the gains period falls wholly or partly within the period of 24 months immediately preceding the start of the loss period,

(d) within 2 years after the end of the loss period the company makes a claim for the purpose in respect of the whole or a part of the net amount of paragraph 45A losses for the loss period.

(2) In any such case -

(a) the net amount of paragraph 45A gains for the gains period, and

(b) the net amount of paragraph 45A losses for the loss period, shall each be reduced (but not below nil) by the amount in respect of which the claim is made.

(3) For the purposes of sub-paragraph (2) -

(a) the net amount of paragraph 45A gains for a later period must be reduced so far as possible before the net amount of paragraph 45A gains for an earlier period, and

(b) where a gains period falls partly before the start of the 24 month period referred to in sub-paragraph (1), only the appropriate fraction of the net amount of paragraph 45A gains for the gains period may be reduced.

(4) For the purposes of sub-paragraph (3), the “appropriate fraction” is -

where -

A is the number of days in the gains period that fall within the 24 month period, and

B is the number of days in the gains period.

(5) For the purposes of this paragraph -

(a) where for any accounting period L exceeds G, there is a net amount of paragraph 45A losses for that period of an amount equal to that excess,

(b) where for any accounting period G exceeds the sum of L and N, there is a net amount of paragraph 45A gains for that period of an amount equal to that excess.

(6) In the application of sub-paragraph (5) in relation to any accounting period of a company -

G is the sum of the amounts of any chargeable gains treated as accruing to the company in the period under paragraph 45A(4)(a) in respect of derivative contracts of the company (“paragraph 45A gains”),

L is the sum of the amounts of any allowable losses treated as accruing to the company in the period under paragraph 45A(4)(b) in respect of derivative contracts of the company,

N is the sum of the amounts of any non-paragraph 45A losses that would fall to be deducted in the period from paragraph 45A gains, on the assumption in sub-paragraph (7).

(7) The assumption is that, as respects the accounting period, non-paragraph 45A losses are treated as being deducted from non-paragraph 45A gains, so far as possible, before any remainder is deducted from paragraph 45A gains.

(8) In this paragraph -

“deducted” means deducted in accordance with section 8(1) of the Taxation of Chargeable Gains Act 1992;

“non-paragraph 45A gains” means any chargeable gains accruing to the company in the accounting period, other than paragraph 45A gains;

“non-paragraph 45A losses” means any allowable losses of the company that may be deducted in the accounting period, other than losses accruing in the period under paragraph 45A(4)(b).

Derivative contracts relating to land or certain tangible movable property

45C - (1) This paragraph applies to a derivative contract of a company for an accounting period if the following conditions are satisfied -

(a) the derivative contract is not one to which the company is party at any time in the accounting period for the purposes of a trade carried on by the company (but see sub-paragraph (2)),

(b) the company is not a body falling within sub-paragraph (3);

(d) sub-paragraph (1A) does not apply..

(1A) This sub-paragraph applies if -

(a) paragraph 45F applies to the derivative contract, or would apply to it but for sub-paragraph (2)(f) of that paragraph, or

(b) paragraph 45K applies to derivative contract, or would apply to it but for sub-paragraph (2)(e) of that paragraph.

(2) The condition in sub-paragraph (1)(a) does not apply if the company -

(a) is party to the derivative contract for the purposes of life assurance business, or

(b) is a mutual trading company.

(3) The bodies that fall within this sub-paragraph are -

an authorised unit trust;

an investment trust;

an open-ended investment company;

a venture capital trust.

(4) The underlying subject matter of a derivative contract falls within this sub-paragraph if it consists of either or both of the following -

(a) land (wherever situated);

(b) tangible movable property, other than commodities which are tangible assets.

This sub-paragraph is subject to the following qualification.

(5) Where the underlying subject matter of a derivative contract includes income from property of either or both of the types described in sub-paragraph (4) and that income is -

(a) subordinate in relation to so much of the underlying subject matter of the derivative contract as consists of property of either or both of those types, or

(b) of small value in comparison with the value of the underlying subject matter as a whole,
that income shall be left out of account in determining for the purposes of sub-paragraph (1)(c) whether the underlying subject matter of the derivative contract falls within sub-paragraph (4).

(6) For the purposes of sub-paragraph (5) whether part of the underlying subject matter of a derivative contract of a company is subordinate or of small value is to be determined by reference to the time when the company enters into or acquires the contract.

Words in bold substituted and inserted by SI 2005/3440 in relation only to accounting periods ending on 31st December 2005. For periods of account beginning on or after 1st January 2005 and ending on or after 16th March 2005 and before 31st December 2005 sub-paragraph (1)(d) read: “paragraph 45F (embedded derivative which is an exactly tracking contract for differences whose subject matter is land) and paragraph 45K (issuers of securities with embedded derivatives: deemed contracts for differences) do not apply to the derivative contract.”

Creditor relationships: embedded derivatives which are options

45D. - (1) This paragraph applies to a derivative contract of a company for an accounting period if the following conditions are satisfied -

(a) section 94A of the Finance Act 1996 (loan relationships with embedded derivatives) has effect in relation to a creditor relationship of the company,

(b) the derivative contract is the relevant contract, or one of the relevant contracts, to which the company is treated under subsection (2)(b) of that section as party in the case of that creditor relationship,

(d) the additional conditions in sub-paragraph (2) are satisfied.

(2) The additional conditions are -

(a) the company is not party to the creditor relationship at any time in the accounting period for the purposes of a trade carried on by it (but see sub-paragraph (3)),

(b)
(c) the underlying subject matter of the derivative contract -

(i) is qualifying ordinary shares (see sub-paragraph (4)), or

(ii) is mandatorily convertible preference shares (see sub-paragraph (4)),

(d) the company is not a body falling within paragraph 45C(3) (authorised unit trusts etc),

(e) this paragraph is not prevented from applying to the derivative contract for the accounting period by paragraph 45E,

(f) the asset representing the creditor relationship is not an existing asset.

(3) The condition in sub-paragraph (2)(a) does not apply if the company -

(a) is party to the creditor relationship for the purposes of life assurance business, or

(b) is a mutual trading company.

(3A) Where in any accounting period -

(a) a company is party to a creditor relationship for the purposes of its life assurance business, and

(b) that creditor relationship is one in relation to which section 94A of the Finance Act 1996 would have effect but for the fact that the company accounts for the creditor relationship at fair value through profit and loss,
this paragraph shall have effect for that accounting period as it would if the creditor relationship were one in relation to which section 94A has effect.

(4) In this paragraph -

“existing asset” means an asset in relation to which paragraph 9(2) of Schedule 10 to the Finance Act 2004 has effect;.

“mandatorily convertible preference shares” means shares -

(a) which represent the creditor relationship,

(b) which are not qualifying ordinary shares, and

(c) which are issued upon terms that stipulate that they must be converted into, or exchanged for, qualifying ordinary shares by a relevant time,

and for this purpose “relevant time” means a time no more than 24 hours after the acquisition of the shares by a person who, immediately before that acquisition, had the creditor relationship;

“qualifying ordinary shares” means shares in a company (the “relevant company”) which satisfy the Conditions in sub-paragraphs (5) and (6).

(5) Condition 1 is that the shares are shares representing some or all of the issued share capital (by whatever name called) of the relevant company, other than -

(a) capital the holders of which have a right to a dividend at a fixed rate but have no other right to share in the profits of that company, or

(b) capital the holders of which have no right to a dividend of any description nor any other right to share in the profits of that company.

(6) Condition 2 is that the shares -

(a) are listed on a recognised stock exchange, or

(b) are shares in a holding company or a trading company.

(7) In sub-paragraph (6) -

“holding company” has the meaning given in paragraph 22(1) of Schedule A1 to the Taxation of Chargeable Gains Act 1992;

“trading company” has the meaning given by paragraph 22A of that Schedule.

(8) The creditor relationship shall not be treated as a qualifying corporate bond by virtue of section 117(A1) of the Taxation of Chargeable Gains Act 1992.

(9) See also paragraph 45H (treatment of gains and losses on terminal exercise of option).

Words in bold substituted by SI 2005/2082 in relation to periods of account beginning on or after 1st January 2005 and ending on or after 16th March 2005.

45E.—(1) Paragraph 45D does not apply to a derivative contract of a company for an accounting period if any of the following Conditions is satisfied in the case of the derivative contract in the period.

(2) In this paragraph “the original asset” means the asset that represents the creditor relationship mentioned in paragraph 45D(1).

(3) Condition 1 is that the rights and liabilities that fall to be treated as comprised in the derivative contract are such that the extent to which shares may be acquired in accordance with them is to be determined using a cash value -

(a) which is specified in the contract for the original asset, or

(b) which is or will be ascertainable by reference to that contract.

(4) Condition 2 is that the rights and liabilities that fall to be treated as comprised in the derivative contract are such that -

(a) the company is entitled or obliged to receive a payment instead of the shares which are the underlying subject matter of the derivative contract, and

(b) the amount of that payment differs by more than an insignificant amount from the value of the shares which the company would be entitled to acquire in accordance with those rights and liabilities at the time it became entitled or obliged to receive the payment.

(5) Condition 3 is that there is for the accounting period a connection (within the meaning of section 87(3) of the Finance Act 1996) between -

(a) the company, and

(b) the company that issued the original asset,

and the original asset is not one in relation to which, by virtue only of subsection (5)(b) of section 73, the amendments made by that section do not have effect.

Words in italics omitted by SI 2005/2082 in relation to periods of account beginning on or after 1st January 2005 and ending on or after 16th March 2005.

Creditor relationships: embedded derivatives which are exactly tracking contracts for differences

45F. - (1) This paragraph applies to a derivative contract of a company for an accounting period if the following conditions are satisfied -

(a) section 94A of the Finance Act 1996 (loan relationships with embedded derivatives) has effect in relation to a creditor relationship of the company,

(d) the additional conditions in sub-paragraph (2) are satisfied.

(2) The additional conditions are -

(a) the creditor relationship is not one to which the company is party at any time in the accounting period for the purposes of a trade carried on by the company (but see sub-paragraph (3)),

(b)

(i) is land (wherever situated), or

(ii) is qualifying ordinary shares listed on a recognised stock exchange,

(d) the company is not a body falling within paragraph 45C(3) (authorised unit trusts etc),

(e) the derivative contract is an exactly tracking contract (see sub-paragraphs (4) to (6)),

(f) the asset representing the creditor relationship is not an existing asset.

(3) The condition in sub-paragraph (2)(a) does not apply if the company -

(a) is party to the creditor relationship for the purposes of life assurance business, or

(b) is a mutual trading company.

(4) For the purposes of this paragraph “an exactly tracking contract” is a contract for differences where D is equal to the amount determined by applying R% to C, where -

D is the amount that must be paid to discharge the rights and liabilities that fall to be treated as comprised in the contract;

R% is a relevant percentage change in the value of the underlying subject matter of the contract (see sub-paragraph (5));

C is the amount falling for the purposes of Chapter 2 of Part 4 of the Finance Act 1996 to be regarded in accordance with generally accepted accounting practice as the initial cost of the asset which represents the creditor relationship.
(5) In sub-paragraph (4), the reference to a relevant percentage change in the value of the underlying subject matter of the contract is a reference to the percentage change (if any) over the relevant period in -

(a) the value of the assets which are the underlying subject matter of the contract,

(b) or any index of the value of those assets.

(6) In sub-paragraph (5) “the relevant period” means -

(a) the period between -

(i) the date when the asset representing the creditor relationship came into existence, and

(ii) the date when the corresponding debtor relationship comes to an end; or

(b) any other period in which almost all of that period is comprised, and which differs from that period exclusively for purposes connected with giving effect to a valuation in relation to rights or liabilities under the asset representing the creditor relationship.

(7) In this paragraph -

“existing asset” means an asset in relation to which paragraph 11(2) of Schedule 10 to the Finance Act 2004 has effect;.

“qualifying ordinary shares” means shares which satisfy Condition 1 in paragraph 45D(5).

(8) The creditor relationship shall not be treated as a qualifying corporate bond by virtue of section 117(A1) of the Taxation of Chargeable Gains Act 1992.

Words in bold substituted by SI 2005/2082 in relation to periods of account beginning on or after 1st January 2005 and ending on or after 16th March 2005.

Creditor relationships: existing assets

45FA - (1) Where paragraph 45D or 45F would apply to a derivative contract for an accounting period but for sub-paragraph (2)(f) of that paragraph -

(a) paragraph 14(3) (non-trading credits and debits) shall not apply to the relevant credits and debits, and

(b) the creditor relationship by virtue of which paragraph 45D or 45F would so apply to that derivative contract shall not be treated as a qualifying corporate bond by virtue of section 117(A1) of the Taxation of Chargeable Gains Act 1992.

(2) For the purposes of this paragraph the relevant credits and debits are the credits and debits given in relation to the contract for the accounting period by paragraph 15

Paragraph inserted by SI 2005/2082 in relation to periods of account beginning on or after 1st January 2005 and ending on or after 16th March 2005.

Property based total return swaps

45G - (1) This paragraph applies to a derivative contract of a company for an accounting period if the following conditions are satisfied -

(a) the derivative contract is a contract for differences,

(b) one or more indices are designated in the contract,

(c) at least one index so designated (the “capital value index”) is an index of changes in the value of land (wherever situated),

(d) the underlying subject matter of the derivative contract also includes interest rates

(e) the additional conditions in sub-paragraph (1A) are satisfied.

(1A) The additional conditions are -

(a) the derivative contract is not one to which the company is party at any time in the accounting period for the purposes of a trade carried on by the company (but see sub-paragraph (1B)), and

(b) the company is not a body falling within paragraph 45C(3) (authorised unit trusts etc).

(1B) The condition in sub-paragraph (1A)(a) does not apply if the company -

(a) is party to the derivative contract for the purposes of life assurance business, or

(b) is a mutual trading company.

(2) In any such case, the relevant credits and debits for the purposes of paragraph 45A(3)(b) are those which -

(a) are given in relation to the derivative contract for the accounting period by paragraph 15, and

(b) fall within sub-paragraph (3).

(3) The credits and debits are those found for the period by applying R% to N, where -

N is the amount which is the notional principal amount in the case of the derivative contract;

R% is the percentage change (if any) in the capital value index over the relevant period.

(4) In sub-paragraph (3) “the relevant period” means -

(a) the accounting period, if the company is party to the derivative contract throughout that period;

(b) in any other case, any part of the accounting period throughout which the company is party to the derivative contract.

Paragraph 45D: treatment of net gains and losses on terminal exercise of option

45H - (1) This paragraph applies where -

(a) a derivative contract is one to which paragraph 45D applies for an accounting period,

(b) rights that fall to be treated as comprised in the derivative contract to any extent exercised or otherwise disposed of in the accounting period, and

(c) those rights are rights to acquire shares.

(2) In any such case -

(a) sub-paragraph (3) has effect in relation to a disposal of the asset representing the creditor relationship mentioned in paragraph 45D(1)(b) (“the associated creditor relationship”), and

(b) sub-paragraph (4) has effect in relation to a disposal of all or any of the shares (“the relevant shares”) acquired -

(i) as a result of the exercise of rights mentioned in sub-paragraph (1)(b), but

(ii) in circumstances where a disposal is deemed not to occur by virtue of section 127 of the Taxation of Chargeable Gains Act 1992.

(3) For the purpose of computing any chargeable gain accruing to the company on a disposal of the asset representing the associated creditor relationship, the sums allowable as a deduction under section 38(1)(a) of the Taxation of Chargeable Gains Act 1992 (acquisition costs) shall -

(a) if G exceeds L, be increased by the amount of that excess,

(b) if L exceeds G, be reduced by the amount of that excess.

(4) For the purpose of computing any chargeable gain accruing to the company on a disposal of all the relevant shares, the sums allowable as a deduction under section 38(1)(a) of the Taxation of Chargeable Gains Act 1992 (acquisition costs) shall -

(a) if G exceeds L, be increased by the amount of that excess,

(b) if L exceeds G, be reduced by the amount of that excess, and, in the case of a part disposal of those shares, section 42(2) of that Act shall have effect accordingly.

(5) If the amount of the excess in sub-paragraph (3)(b) or (4)(b) is greater than the amount of expenditure allowable under section 38(1)(a) of the Taxation of Chargeable Gains Act 1992, the amount of the excess that cannot be deducted from the expenditure so allowable shall, for the purpose mentioned in sub-paragraph (3) or (4) (as the case may be), be added to the amount of the consideration for the disposal of the shares.

(6) In this paragraph -

G is the sum of -

(a) the initial carrying value of the derivative contract, and

(b) the amounts of any chargeable gains treated as accruing to the company under paragraph 45A(4)(a) in respect of the derivative contract in each relevant accounting period, so far as referable, on a just and reasonable apportionment, to the shares acquired as a result of the exercise of rights mentioned in sub-paragraph (1)(b);

L is the sum of the amounts of any allowable losses treated as accruing to the company under paragraph 45A(4)(b) in respect of the derivative contract in each relevant accounting period, so far as so referable.

(7) For the purposes of sub-paragraph (6) -

(a) the “initial carrying value” of the derivative contract is the amount treated in accordance with section 94A(2) of the Finance Act 1996 as the carrying value of the derivative contract at the time the company became party to the loan relationship;

(b) a “relevant accounting period” is -

(i) the accounting period in which the disposal in question is made, or

(ii) any previous accounting period.

Paragraph inserted by SI 2005/2082 in relation to periods of account beginning on or after 1st January 2005 and ending on or after 17th August 2005.

In relation accounting periods ending before 31st December, sub-paragraph (1)(b) read “rights that fall to be treated as comprised in the derivative contract are exercised to any extent in the accounting period, and” and sub-paragraph (2)(b)(i) and (ii) read “(i) as a result of the exercise of rights mentioned in sub-paragraph (1)(b), but (ii) otherwise than as a result of a disposal of the associated creditor relationship.

Treatment of credits and debits on terminal exercise of option

45HA - (1) This paragraph applies to a derivative contract of a company if the following conditions are satisfied -

(a) a company is a party to a derivative contract in an accounting period otherwise than by virtue of section 94A(2)(b) of the Finance Act 1996,

(b) the derivative contract is an option,

(c) rights comprised in the derivative contract are exercised to any extent in that accounting period, and

(d) those rights are rights to acquire shares.

(2) In any such case, for the purpose of computing any chargeable gain accruing to the company on a disposal by it of all the shares so acquired, the sums allowable as a deduction under section 38(1)(a) of the Taxation of Chargeable Gains Act 1992 (acquisition costs) shall

(a) if G exceeds L, be increased by the amount of that excess,

(b) if L exceeds G, be reduced by the amount of that excess,

and, in the case of a part disposal of those shares, section 42(2) of that Act shall have effect accordingly.

(3) If the amount of the excess in sub-paragraph (2)(b) is greater than the amount of expenditure allowable under section 38(1)(a) of the Taxation of Chargeable Gains Act 1992, the amount of the excess that cannot be deducted from the expenditure so allowable shall, for the purpose mentioned in sub-paragraph (2), be added to the amount of the consideration for the disposal of the shares.

(4) In this paragraph -

G is the sum of the credits brought into account under paragraph 14(3) in respect of the derivative contract in each relevant accounting period so far as referable, on a just and reasonable apportionment, to the shares acquired as a result of the exercise of the rights mentioned in sub-paragraph (1)(b);

L is the sum of the debits brought into account under paragraph 14(3) in respect of the derivative contract in each relevant accounting period, so far as so referable.

(5) For the purposes of sub-paragraph (4) a “relevant accounting period” is

(a) the accounting period in which the disposal in question is made, or

(b) any previous accounting period.

Paragraph inserted by SI 2005/2082 in relation to periods of account beginning on or after 1st January 2005 and ending on or after 17th August 2005. In relation only to accounting periods ending before 31st December, in G and L in sub-paragraph (4) “paragraph 14(3)” read “paragraph 14(2)”

Index-linked gilt-edged securities with embedded contracts for differences

45I. - (1) This paragraph applies to a derivative contract of a company for an accounting period if the following conditions are satisfied -

(a) section 94A of the Finance Act 1996 (loan relationships with embedded derivatives) has effect in relation to a creditor relationship of the company,

(b) that creditor relationship is an index-linked gilt-edged security,

(c) the credits and debits which fall to be brought into account for the accounting period for the purposes of Chapter 2 of Part 4 of the Finance Act 1996 in respect of the equivalent deemed loan relationship are non-trading credits and non-trading debits,

(d) the derivative contract is the relevant contract to which the company is treated under subsection (2)(b) of section 94A of the Finance Act 1996 as party in the case of the creditor relationship,

(e) that relevant contract is treated by virtue of subsection (3) of that section as a contract for differences.

(2) The credits and debits that would, apart from this paragraph, fall to be brought into account under this Schedule in respect of the derivative contract for the accounting period shall not be so brought into account.

(3) In this paragraph -

“the equivalent deemed loan relationship” is the loan relationship to which, in the case of the creditor relationship, the company is treated as party under section 94A(2)(a) of the Finance Act 1996;

“gilt-edged security” has the meaning given by section 103(1) of the Finance Act 1996;

“index-linked gilt-edged security” means any gilt-edged security the amount of the payments under which is determined wholly or partly by reference to the retail prices index;

“the retail prices index” has the same meaning as in the Income Tax Acts (see section 833(2) of the Taxes Act 1988).

Issuers of securities with embedded derivatives: deemed options

45J. - (1) This paragraph applies to a derivative contract of a company for an accounting period if the following conditions are satisfied -

(a) section 94A of the Finance Act 1996 (loan relationships with embedded derivatives) has effect in relation to a debtor relationship of the company,

(d) the additional conditions in sub-paragraph (2) are satisfied,

(2) The additional conditions are -

(a) at the time when the company became party to the debtor relationship -

(i) it was not carrying on a banking business or a business as a securities house, or

(ii) if it was carrying on such a business, it did not become party to the debtor relationship in the ordinary course of that business,

(b) the underlying subject matter of the derivative contract is shares,

(3) Where this paragraph applies to a derivative contract for an accounting period -

(a) paragraph 14(2) and (3) (trading and non-trading credits and debits) shall not apply to the credits and debits given in relation to the contract for the accounting period by paragraph 15, but

(b) sub-paragraph (5), (7) or (9) (as the case may be) of this paragraph shall, subject to sub-paragraph (4), apply instead.

(4) Where a company is a party to the debtor relationship mentioned in sub-paragraph (1) immediately before its first accounting period to begin on or after 1st January 2005,

(a) sub-paragraphs (5) and (9) do not apply, but

(b) where sub-paragraph (7) applies, E shall be taken to be nil and an allowable loss of an amount equal to F shall accordingly be treated as accruing to the company in the accounting period there mentioned.

(4A) Sub-paragraph (5) applies if -

(a) the option mentioned in sub-paragraph (1)(c) is exercised at any time in an accounting period, and

(b) shares are issued or transferred in fulfilment of the obligations under the option (the “relevant disposal”).

(5) Where this sub-paragraph applies -

(a) section 144(2) of the Taxation of Chargeable Gains Act 1992 (exercise of options) applies to the relevant disposal as if the amount treated in accordance with section 94A(2) of the Finance Act 1996 as the carrying value of the option at the time the company became party to the loan relationship (the “initial carrying value”) was the consideration for the grant of the option;

(b) to the extent that it would otherwise apply, section 17(1) of the Taxation of Chargeable Gains Act 1992 (deemed market value consideration) does not apply to the relevant disposal.

(6) Sub-paragraph (7) applies if -

(a) the option mentioned in sub-paragraph (1)(c) is exercised at any time in an accounting period,

(b) there is no relevant disposal, and

(7) Where this sub-paragraph applies -

(a) if E exceeds F, a chargeable gain equal in amount to the amount of the excess shall be treated as accruing to the company in the accounting period,

(b) if F exceeds E, an allowable loss equal in amount to the amount of the excess shall be treated as accruing to the company in the accounting period,

(8) In sub-paragraph (7) -

E is the initial carrying value of the option;

F is -

(a) the amount paid by the debtor in fulfilment of the obligations under the option, unless paragraph (b) applies, or

(b) where a single amount is paid in fulfilment of the obligations under the debtor relationship, the part of the amount which falls to be treated for accounting purposes as the amount relating to the option.

(9) This sub-paragraph applies if the company ceases to be a party to the debtor relationship at a time when the option mentioned in sub-paragraph (1)(c) has not been exercised, and where it applies the company is treated for the purposes of corporation tax on chargeable gains as having -

(a) acquired the option for a consideration equal to the carrying value of the option at the time the company ceases to be a party to the debtor relationship, and

(b) disposed of the option for a consideration equal to the initial carrying value.

(10) In this paragraph -

"option" has the same meaning as in paragraph 12, apart from sub-paragraph (10);

"securities house" means a person -

(a) who is authorised for the purposes of the Financial Services and Markets Act 2000, and

(b) whose business consists wholly or mainly of dealing as a principal in financial instruments within the meaning of section 349(5) and (6) of the Taxes Act 1988.

Words in bold substituted by SI 2005/2082 in relation to periods of account beginning on or after 1st January 2005 and ending on or after 17th August 2005. In relation only to accounting periods ending before 31st December, in paragraph (a) of the definition of “F” in sub-paragraph (8) the words “paid by the debtor” are omitted

Issuers of securities with embedded derivatives: equity instruments

45JA. - (1) This paragraph applies to a company for an accounting period if the following conditions are satisfied -

(a) section 94A of the Finance Act 1996 (loan relationships with embedded derivatives) has effect in relation to a debtor relationship of the company,

(b) the division mentioned in subsection (1) of that section in the case of that debtor relationship is between -

(i) rights and liabilities under a loan relationship, and

(ii) rights and liabilities under an equity instrument,

(c) in the case of that debtor relationship, the company is treated under subsection (2)(b)(i) of that section as party to a relevant contract,

(d) the relevant contract is treated by virtue of subsection (3) of that section as an option,

(e) the relevant contract is not a derivative contract,

(f) the company pays an amount in the accounting period to the person who is party to the loan relationship as creditor in discharge of any obligations under that relationship,

(g) the additional conditions in sub-paragraph (2) are satisfied.

(2) The additional conditions are -

(a) at the time when the company became party to the debtor relationship -

(i) it was not carrying on a banking business or a business as a securities house, or

(ii) if it was carrying on such a business, it did not become party to the debtor relationship in the ordinary course of that business;

(b) the liability representing the debtor relationship was not owed by the company immediately before its first accounting period to begin on or after 1st January 2005; and

(c) the company is not a body falling within paragraph 45C(3) (authorised unit trusts etc.).

(3) If RA exceeds E, an allowable loss equal to the amount of the excess shall be treated as accruing to the company for the purposes of corporation tax on chargeable gains in the accounting period.

(4) In sub-paragraph (3) -

RA is -

(a) the amount paid as mentioned in sub-paragraph (1)(f), less

(b) so much of that amount as is treated for accounting purposes as paid in discharge of the liabilities mentioned in sub-paragraph (1)(b)(i);

E is the amount treated in accordance with section 94A(2) of the Finance Act 1996 as the carrying value of the relevant contract at the time the company became party to the debtor relationship.

(5) In this paragraph “option” and “securities house” have the same meaning as in paragraph 45J(10).

Words in bold substituted by SI 2005/2082 in relation to periods of account beginning on or after 1st January 2005 and ending on or after 16th March 2005.

Issuers of securities with embedded derivatives: deemed contracts for differences

45K. - (1) This paragraph applies to a derivative contract of a company for an accounting period if the following conditions are satisfied -

(a) section 94A of the Finance Act 1996 (loan relationships with embedded derivatives) has effect in relation to a debtor relationship of the company,

(c) the relevant contract is treated by virtue of subsection (3) of that section as a contract for differences (other than one which falls within paragraph 45J), and

(d) the derivative contract is -

(i) an exactly tracking contract within the meaning of paragraph 45F, or

(ii) a contract that would be such a contract but for any condition in the contract that D cannot be less than 90% of C (where D and C have the same meaning as in paragraph 45F(4)), and

(e) the additional conditions in sub-paragraph (2) are satisfied.

(2) The additional conditions are -

(a) at the time when the company became party to the debtor relationship -

(i) it was not carrying on a banking business or a business as a securities house, or

(ii) if it was carrying on such a business, it did not become party to the debtor relationship in the ordinary course of that business,

(b) the derivative contract is not one to which any of paragraphs 6 to 8 applies,

(d) the company is not a body falling within paragraph 45C(3) (authorised unit trusts etc),

(e) the liability representing the debtor relationship is was not owed by the company immediately before the first accounting period to which this paragraph applies to the company.

(3) Where this paragraph applies to a derivative contract for an accounting period -

(a) paragraphs 14(2) (trading credits and debits) and 14(3) (non-trading credits and debits) shall not apply to credits and debits given in relation to the contract for the accounting period by paragraph 15, but

(b) sub-paragraph (3A) shall have effect.

(3A) Where -

(a) the debtor relationship of the company comes to an end, and

(b) an amount (“the discharge amount”) is paid to discharge all the company’s obligations under that relationship,
then, for the purposes of corporation tax on chargeable gains, there shall be treated as accruing to the company a chargeable gain or allowable loss of an amount determined in accordance with sub-paragraph (3B)

(3B) That amount is the amount of the gain or loss (as the case may be) that would accrue on the assumption that -

(a) the derivative contract is an asset of the company,

(b) there is a disposal of that asset at the time when the debtor relationship comes to an end,

(c) the consideration for the disposal of that asset is equal to the amount of the proceeds of issue of the security representing the debtor relationship, and

(d) the cost of the asset is equal to the discharge amount.

(4) In this paragraph "securities house" has the same meaning as in paragraph 45J (see sub-paragraph (10) of that paragraph).

Words in bold substituted by SI 2005/2082 in relation to periods of account beginning on or after 1st January 2005 and ending on or after 17th August 2005.

Derivatives not embedded in a loan relationship

45L. - (1) This paragraph applies where -

(a) a company is treated under paragraph 2(4) as party to an embedded derivative contract,

(aa) the relevant contract falls within paragraph 3(1)(a) and (3),

(ab)paragraph 45M does not apply in relation to the contract,

(b) regulation 9 of the Disregard Regulations (interest rate contracts) does not apply to the contract, and

(c) no election having effect in relation to the derivative contract is or has been made under sub-paragraph (2A).

(1A) In this paragraph “the original contract” means the contract mentioned in paragraph 2(3) to which the company is party and as a result of which the company falls to be treated by virtue of paragraph 2(4) as a party to the derivative contract.

(1B) Where this paragraph applies -

(a) paragraph 14(2) and (3) (trading and non-trading credits and debits) do not apply in relation to the derivative contract, but

(b) sub-paragraph (1C) or (2) applies in relation to the original contract, according to whether or not that contract is a derivative contract.

(1C) If the original contract is a derivative contract, profits and losses are to be computed for the purposes of this Schedule as if that contract -

(a) were not one where the rights and liabilities are treated as divided as mentioned in paragraph 2(3), and

(b) were not one in relation to which a fair value basis of accounting is used.

(2) If the original contract is not a derivative contract, profits and losses are to be brought into account for the purposes of the Corporation Tax Acts in relation to that contract as if that contract -

(a) were not one where the rights and liabilities are treated as divided as mentioned in paragraph 2(3), and

(b) were not one in relation to which a fair value basis of accounting is used.

This sub-paragraph has effect notwithstanding paragraph 1(2).

(2A) A company may elect that this paragraph is not to apply to any of its contracts unless -

(a) the contract is a contract of long-term insurance, or
(b) the underlying subject matter of the embedded derivative contract is, or includes, commodities.

Paragraph 45LA contains further provisions about elections under this paragraph.

(2B) Any such election -

(a) must be made by giving notice in writing to Her Majesty’s Revenue and Customs,

(b) must be made before the end of the first applicable accounting period of the company, and

(c) is irrevocable.

(2C) For the purposes of sub-paragraph (2B), the “first applicable accounting period” is the first accounting period ending on or after 17th August 2005 in which the conditions in paragraphs (a) to (b) of sub-paragraph (1) are satisfied.

(3) In this paragraph "the Disregard Regulations" means the Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) Regulations 2004.

Words in bold in sub-paragraph (1) and sub-paragraphs (2) to (2C) substituted by SI 2005/2082 in relation to periods of account beginning on or after 1st January 2005 and ending on or after 16th March 2005.

Fullout words in sub-paragraph (1) omitted and sub-paragraphs (1A) to (2) substituted by SI 2005/3440 only for accounting periods ending on 31st December 2005. Previously fullout words of sub-paragraph (1) “paragraph 14(2) and (3) (trading and non-trading credits and debits) shall not apply to credits and debits given in relation to the fair value of the profits and losses arising on the contract” (Words in bold apply for periods of account ending on or after 16th March 2005. Sub-paragraph (2) previously “(2) Where sub-paragraph (1) applies, then notwithstanding paragraph 1(2) of this Schedule, profits and losses are to be brought into account for the purposes of the Corporation Tax Acts in relation to the contract mentioned in sub-paragraph (3) of paragraph 2 as if that sub-paragraph did not apply to it.” (periods of account ending on or after 16th March 2005 – for period ending before that date for the words in bold “the derivative contract embedded in the host contract were treated for accounting purposes as closely related to the host contract”)

Paragraph (2A) substituted only for accounting periods ending on 31st December 2005 – for other periods “A company may elect that this paragraph is not to apply to any of its contracts.”

Elections under paragraph 45L: further provisions

45LA. - (1) In this paragraph “a disapplication election” means an election under paragraph 45L(2A).

(2) Where -

(a) a company makes a disapplication election in relation to its contracts,

(b) another company, which is a member of the same group as the company making the election, is a party to a contract to which the election applies, and the other company shall be treated, in relation to that contract, as if it had also made a disapplication election.

(3) Where -

(a) a company (“the electing company”) makes a disapplication election in relation to its contracts,

(b) another company (“the transferee”) becomes party to a contract, to which paragraph 2(3) applies, in place of the electing company (whether before or after the disapplication election is made),

(c) the transferee is a member of the same group of companies as the electing company at the time of the transfer, and

the other company shall be treated, in relation to the contract referred to in paragraph (b), as if it had also made a disapplication election.

(4) Where -

(a) a company (“A”) is treated under paragraph 2(4) as party to a relevant contract to which paragraph 45L(1) applies,

(b) another company (“B”), becomes a party to that contract in place of A,

(c) A and B are members of the same group of companies when B becomes a party to the contract, and
(d) paragraph 45L(1) does not apply to the B’s other relevant contracts by reason of a disapplication election (whenever made),

sub-paragraph (5) applies, unless A, subsequent to B’s becoming party to the contract, makes a disapplication election.

(5) Where this sub-paragraph applies B shall be treated, in relation to the contract referred to in sub-paragraph (4)(b), as if paragraph 45L(1) applied to it.

(6) In this paragraph references to companies being members of the same group of companies shall be construed in accordance with section 170 of the Taxation of Chargeable Gains Act 1992.

Paragraph inserted by SI 2005/3440 only for accounting periods ending on 31st December 2005

Treatment of host contract as a loan relationship

45M. - (1) This paragraph applies where for an accounting period -

(a) a company is treated under paragraph 2(4) as party to embedded derivative contract,

(b) the contract is treated as a derivative contract falling within paragraph 3(1)(a) or (b),

(i) shares in a company, or

(ii) rights of a unit holder under a unit trust scheme, and

(d) the host contract is treated for accounting purposes as, or as forming part of, a financial asset.

(2) Where this sub-paragraph applies -

(a) the host contract shall be treated for the purposes of the Corporation Tax Acts as if it were a creditor relationship of the company which is a zero coupon bond, and

(b) the derivative contract shall be treated as satisfying the conditions in paragraph 4(2A).

(3) For the purposes of this paragraph a “zero coupon bond” is a security -

(a) whose issue price is less than the amount payable on redemption, and

(b) which does not provide for any amount to be payable by way of interest.

(4) Paragraph 9 applies for the purpose of determining whether the underlying subject matter is to be treated as consisting wholly of property referred to in sub-paragraph (1)(c).

(5) For the purposes of sub-paragraph (1)(d), the host contract is treated for accounting purposes as, or as forming part of, a financial asset for an accounting period if, for that accounting period, -

(a) it is so treated for the purposes of the relevant accounting standard used by the company for that accounting period, or

(b) it would be so treated if the company used a relevant accounting standard for that accounting period in respect of the host contract.

(6) Sub-paragraph (5) of paragraph 3 (meaning of “relevant accounting standard”) applies for the purposes of sub-paragraph (5) as it applies for the purposes of sub-paragraphs (3) and (4) of that paragraph.

Words in bold substituted, words in italics omitted, by SI 2005/2082 in relation to periods of account beginning on or after 1st January 2005 and ending on or after 16th March 2005.

In sub-paragraph (1)(a) for accounting periods ending before 31st December 2005, for “embedded derivative contract” read “relevant contract”.

Contracts where part of underlying subject matter of excluded type

46—(1) This paragraph applies to a relevant contract of a company -

(a) which is an option or future,

(b) which satisfies the requirements of paragraph 3 (accounting requirements etc), and

(2) The underlying subject matter of a relevant contract falls within this sub-paragraph if it consists of -

(a) any one or more of the excluded types of property falling within paragraph (a) or (b) of sub-paragraph (2) of paragraph 4, and

(b) underlying subject matter other than that referred to in paragraph (a).

(3) Where this paragraph applies to a relevant contract of a company, it shall be treated for the purposes of the Corporation Tax Acts as if it were two separate contracts, namely -

(a) a relevant contract of the company whose underlying subject matter consists of the excluded types of property referred to in sub-paragraph (2)(a), and

(b) a relevant contract of the company whose underlying subject matter consists of the underlying subject matter referred to in sub-paragraph (2)(b).

(4) For the purposes of giving effect to sub-paragraph (3) all such apportionments as are just and reasonable shall be made.

(5) This paragraph does not apply to a relevant contract if it is determined in accordance with paragraph 9 that the underlying subject matter of the relevant contract in question is to be treated as consisting wholly of any one or more of the excluded types of property referred to in sub-paragraph (2)(a).

Paragraphs 48 and 48A repealed by article 20 Finance Act 2002, Schedule 26, Parts 2 and 9 (Amendment) Order, SI 2005/646 with effect in relation to periods of account beginning on or after 1 January 2005, and ending on or after 16 March 2005.

Partnerships involving companies

49 - (1) This paragraph applies where -

(a) a trade, profession or business is carried on by persons in partnership (“the firm”);

(b) any of those persons is a company (a “company partner”); and

(c) the firm is party to a contract which is a derivative contract or would be a derivative contract if the firm were a company.

(2) In any such case -

(a) in computing the profits and losses of the trade, profession or business for the purposes of corporation tax in accordance with section 114(1) of the Taxes Act 1988 (computation as if the partnership were a company) no credits or debits shall be brought into account under this Schedule in respect of the contract; but

(b) credits and debits shall be brought into account under this Schedule in respect of the contract in accordance with the following provisions of this paragraph by each company partner for each of its accounting periods in which the conditions in sub-paragraph (1) are satisfied.

(3) The credits and debits to be brought into account as mentioned in sub-paragraph (2)(b) shall be determined separately in the case of each company partner.

(4) For the purpose of determining those credits and debits in the case of any particular company partner -

(a) the contract entered into or acquired by the firm shall be treated as if it were instead entered into or acquired by that company partner, for the purposes of the trade, profession or business which that company partner carries on,

(b) anything done by or in relation to the firm in connection with the contract shall be treated as done by or in relation to the company partner, and

(c) to the extent that any exchange gains or losses arising from the contract are recognised in the firm’s statement of recognised gains and losses or statement of changes in equity, the exchange gains or losses shall to that extent be treated as if they had been recognised in the corresponding statement of the company partner.

and credits and debits (the “gross credits and debits”) shall be determined accordingly.

(5) The credits and debits to be brought into account under this Schedule pursuant to sub-paragraph (2)(b)in the case of any particular company partner shall be that company partner’s appropriate share of the gross credits and debits determined in accordance with sub-paragraph (4) in the case of that company partner.

(6) For the purposes of sub-paragraph (5), the “appropriate share”, in the case of a company partner, is the share that would be apportioned to that company partner if -

(a) the gross credits and debits determined in accordance with sub-paragraph (4) in the case of that company partner fell to be apportioned between the partners; and

(b) the apportionment fell to be made in the shares in which any profit or loss computed in accordance with subsection (1) of section 114 of the Taxes Act 1988 would be apportioned between them under subsection (2) of that section.

Partnerships involving companies: use of fair value accounting

50 - (1) Where the company partner uses fair value accounting in relation to its interest in the firm, the debits and credits to be brought into account under paragraph 49 by that company must be determined on the basis of fair value accounting.

(2) In this paragraph “company partner” and “firm” have the same meaning as in paragraph 49.

Adjustment on company changing to international accounting standards

50A - (1) This paragraph applies where -

(a) there is a change of accounting policy in drawing up a company’s accounts from one period of account (the ”earlier period”) to the next (the “later period”), and

(b) the approach in each of those periods accorded with the law and practice applicable in relation to that period.
(1A) This paragraph applies, in particular, where -

(a) the company prepares accounts for the earlier period in accordance with UK generally accepted accounting practice and for the later period in accordance with international accounting standards, or

(b) the company prepares accounts for the earlier period in accordance with international accounting standards and for the later period in accordance with UK generally accepted accounting practice.

(2) If there is a difference between -

(a) the accounting value of a derivative contract of the company at the end of the earlier period, and

(b) the accounting value of that contract at the beginning of the later period, a corresponding debit or credit (as the case may be) shall be brought into account for the purposes of this Schedule in the later period.

(3) In sub-paragraph (2) “accounting value” means subject to paragraph (3B), the carrying value of the contract recognised for accounting purposes.

(3A) For the purposes of this paragraph the "carrying value" of a contract includes amounts recognised for accounting purposes in relation to the contract in respect of -

(a) accrued amounts;

(b) amounts paid or received in advance;

(3B) In determining the profits, gains and losses to be recognised in determining the carrying value of the contract for the purposes of this paragraph, the following provisions -

(a) section 94A(2) of the Finance Act 1996 (loan relationships with embedded derivatives), and

(b) paragraphs 21 and 28 of this Schedule

apply as they apply for the purposes of determining the credits and debits to be brought into account under this Schedule.

(3C) Where -

(a) a company has ceased to be a party to a derivative contract,

(b) paragraph 53(3) of this Schedule (credits and debits to be brought into account in respect of profits and losses arising in the cessation period) applied to the cessation, and

(i) the amount outstanding in respect of the derivative contract at the end of the earlier period, and

(ii) the amount outstanding in respect of the derivative contract at the beginning of the later period,

a debit or credit (as the case may be) corresponding to that difference shall be treated as a debit or credit falling within sub-paragraph (2).

(3D) In sub-paragraph (3C), "the amount outstanding", in respect of a derivative contract, means so much of the amount recognised as deferred income or deferred loss in the company's balance sheet, in accordance with generally accepted accounting practice, in respect of the profits, gains or losses that arose from that relationship or a related transaction in the cessation period (within the meaning of section 103(6)) as has not been represented by debits or credits brought into account under this Schedule.

(5) This paragraph does not apply if or to the extent that such a debit or credit as is mentioned in sub-paragraph (2) falls to be brought into account apart from this paragraph.

Prevention of deduction of tax

51 - Notwithstanding anything in section 349 of the Taxes Act 1988 or any other provision of the Tax Acts, where the profits and losses arising from a derivative contract of a company are computed in accordance with this Schedule, the company shall not be required, on making a payment under the contract, to deduct out of it any sum representing an amount of income tax on it.