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Corporation Tax Act 2009

Type Public General Act

Publication 2009-03-26

Last updated 2025-04-01

State In force

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(a) it is not a derivative contract for the purposes of this Part but for this section, and

(b) its underlying subject matter consists wholly or partly of a relevant holding in that period.

(2) This Part has effect—

(a) for that accounting period, and

(b) for any succeeding accounting period in which the relevant contract is a relevant contract of the company,

as if the relevant contract were a derivative contract.

(3) For the purposes of this section, the underlying subject matter of a contract consists wholly or partly of a relevant holding in an accounting period if—

(a) at any time in that period it consists wholly or partly of—

(i) any shares in an open-ended investment company,

(ii) any rights under a unit trust scheme, or

(iii) an interest in an offshore fund (within the meaning of section 355 of TIOPA 2010), and

(b) there is a time in the period when that company, scheme or fund fails to meet the qualifying investments test.

(4) In subsection (3) “meeting the qualifying investments test” has the same meaning as in section 493 (the qualifying investments test).

(5) See section 18(2)(c)(ii) of F(No.2)A 2005 (section 17(3): specific powers) for the power to modify the meaning of “relevant holding” for the purposes of this section by regulations under section 17(3) of that Act (regulations about authorised unit trusts and OEICs).

(6) For the way in which credits and debits are to be brought into account where this section applies, see section 601 (application of fair value accounting).

(7) See also—

(a) section 602 (contract becoming one relating to holding in OEIC, unit trust or offshore fund), and

(b) section 660 (company ceasing to be party to contract relating to holding in OEIC, unit trust or offshore fund).

Associated transaction treated as derivative contract

588

(1) This section is to be read as if it were in Chapter 7 (shares with guaranteed returns etc) of Part 6 (relationships treated as loan relationships etc).

(2) See, in particular—

section 526(2) (meaning of “non-qualifying share”), and

section 532 (meaning of “associated transaction” and “the associated transactions condition”).

(3) Subsection (4) applies in a case which falls within section 523(1)(b)(ii) (loan relationships: non-qualifying shares) because the share mentioned in section 523(1)(a) is a non-qualifying share as a result of the associated transactions condition being met.

(4) An associated transaction is treated for the purposes of this Part as a derivative contract or a transaction in respect of a derivative contract if it is not in fact such a contract or transaction.

(5) For the way in which credits and debits are to be brought into account where subsection (4) applies, see section 603 (application of fair value accounting).

Exclusions from derivative contracts

Contracts excluded because of underlying subject matter: general

589

(1) A relevant contract is not a derivative contract for the purposes of this Part if its underlying subject matter—

(a) consists wholly of excluded property (see subsections (2) to (5)), or

(b) is treated as consisting wholly of such property.

(2) “Excluded property” means—

(a) intangible fixed assets,

(b) shares in a company other than shares within subsection (3), or

(c) rights of a unit holder under a unit trust scheme other than a scheme in relation to which section 490 (holdings in OEICs, unit trusts and offshore funds treated as creditor relationship rights) has effect.

(3) The shares within this subsection are—

(a) shares to which section 524 or 526 (shares subject to outstanding third party obligations and shares which are non-qualifying shares) applies, and

(b) shares in an open-ended investment company in relation to which section 490 has effect.

(4) Subsection (2)(a) applies only in relation to a relevant contract which is an option or future.

(5) Subsection (2)(b) and (c) apply only in relation to a relevant contract which—

(a) meets any of conditions A to E in section 591, and

(b) is not designed to produce a return which equates in substance to the return on an investment of money at a commercial rate of interest.

(6) Section 590 applies for determining whether the underlying subject matter of a relevant contract is to be treated as consisting wholly of excluded property.

Disregard of subordinate or small value underlying subject matter

590

(1) This section applies in relation to a relevant contract if its underlying subject matter consists only of—

(a) excluded property, and

(b) other underlying subject matter which is—

(i) subordinate in relation to any of the excluded property, or

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

(2) The underlying subject matter of the contract is treated for the purposes of this Part as if it consisted wholly of excluded property.

(3) For the purposes of this section, 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 contract.

(4) In this section “excluded property” has the same meaning as in section 589.

Conditions A to E mentioned in section 589(5)

591

(1) The following are the conditions mentioned in section 589(5).

(2) Condition A is that the relevant contract—

(a) is a plain vanilla contract entered into or acquired by a company carrying on long-term business,

(b) is an approved derivative for the purposes of Rule 3.2.5 of the Prudential Sourcebook for Insurers (within the meaning given by section 139(4) of FA 2012), and

(c) does not meet the condition in section 579(1)(b) (contract which is or forms part of a financial asset or liability for accounting purposes).

(3) Condition B is that—

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

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

(i) an 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 or any liability related to share capital of the company, and

(c) the relevant contract is not one to which the company is treated as a party under section 585(2) (loan relationships with embedded derivatives).

(4) Condition C is that—

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

(b) the relevant contract is an option which is listed on a recognised stock exchange to subscribe for shares in a company.

(5) Condition D is that—

(a) the relevant contract is entered into or acquired by a company otherwise than in the course of activities forming an integral part of a trade carried on by it,

(b) the relevant contract is—

(i) an option to acquire shares in a company, or

(ii) a future requiring delivery of shares in a company,

(d) the shares to be acquired or delivered—

(i) constitute a substantial shareholding within the meaning of paragraph 8 of Schedule 7AC to TCGA 1992 (meaning of “substantial shareholding”), or

(ii) would do so if acquired or delivered.

(6) Condition E is that—

(a) the company which is a party to 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 585(1) (loan relationships with embedded derivatives), and

(b) each relevant contract to which the company is treated as a party under section 585(2) in the case of that loan relationship is a derivative contract to which any of the provisions in subsection (7) applies.

(7) The provisions mentioned in subsection (6)(b) are—

(a) section 645 (creditor relationships: embedded derivatives which are options),

(b) section 648 (creditor relationships: embedded derivatives which are exactly tracking contracts for differences),

(d) section 658 (issuers of securities with embedded derivatives: deemed contracts for differences).

(8) For the cases in which sections 653 to 655 and section 658 apply, see sections 652 and 656 respectively.

Embedded derivatives treated as meeting condition in section 591 etc

592

(1) This section applies if for an accounting period—

(a) a company is a party to a hybrid derivative which meets the condition in section 579(1)(b) (contract which is or forms part of a financial asset or liability for accounting purposes),

(b) the embedded derivative is a relevant contract which meets the condition in section 579(1)(a) (contract treated for accounting purposes as derivative),

(i) shares in a company, or

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

(d) the host contract is or forms part of a financial asset or liability for accounting purposes.

(2) The embedded derivative is treated—

(a) for the purposes of section 589 (contracts excluded because of underlying subject matter: general) as meeting one of the conditions in section 591, and

(b) as a chargeable asset.

(3) The host contract is treated for the purposes of the Corporation Tax Acts as if it were a creditor relationship of the company (see Part 5 (loan relationships)).

(4) Section 590 (disregard of subordinate or small value underlying subject matter) applies for the purpose of determining whether the underlying subject matter is to be treated as consisting wholly of property mentioned in subsection (1)(c) as that section so applies in relation to excluded property.

(5) In this section—

“the embedded derivative” means the relevant contract to which the company is treated as a party under section 584(2)(a) because of the hybrid derivative mentioned in subsection (1)(a), and

“the host contract” means the relevant contract to which the company is treated as a party under section 584(2)(b) because of that hybrid derivative.

Contracts where part of underlying subject matter is excluded property

593

(1) This section applies to a relevant contract of a company—

(a) which is an option or future,

(b) which meets any of the accounting conditions in section 579(1), and

(i) excluded property, and

(ii) other underlying subject matter.

(2) A relevant contract to which this section applies is treated for the purposes of the Corporation Tax Acts as if it were the following two contracts—

(a) a relevant contract whose underlying subject matter consists of the excluded property, and

(b) a relevant contract whose underlying subject matter consists of the other underlying subject matter.

(3) For the purposes of giving effect to subsection (2), all such apportionments as are just and reasonable are to be made.

(4) This section does not apply to a relevant contract if it is determined in accordance with section 590 (disregard of subordinate or small value underlying subject matter) that the underlying subject matter of the relevant contract is to be treated as consisting wholly of excluded property.

(5) In this section “excluded property” has the same meaning as in section 589 (contracts excluded because of underlying subject matter: general).

Chapter 3 — Credits and debits to be brought into account: general

Introduction

Overview of Chapter

594

(1) This Chapter contains rules of general application about the credits and debits to be brought into account for the purposes of this Part.

(2) In particular, it—

(za) makes provision about the matters in respect of which amounts are to be brought into account (see section 594A),

(a) sets out the general principles which are to apply in relation to the bringing into account of credits and debits, including the use of generally accepted accounting practice and the taking into account of related transactions (see sections 595 and 596),

(b) makes provision about the interpretation of the expression “amounts recognised in determining a company's profit or loss” (see sections 597 to 599),

(d) sets out some general rules which differ from generally accepted accounting practice (see sections 604 and 605),

(e) makes provision about exchange gains and losses (see section 606),

(f) makes provision about pre-contract or abortive expenses (see section 607),

(g) makes provision about cases where amounts are recognised even though companies are not, or have ceased to be, parties to derivative contracts (see section 607A),

(ga) makes provision about companies moving abroad (see sections 609 and 610), and

(h) makes provision in relation to statutory insolvency arrangements (see section 611).

General principles

General principles about the bringing into account of credits and debits

595

(1) This Part operates by reference to the accounts of companies and amounts recognised for accounting purposes in those accounts.

(2) The general rule is that the amounts to be brought into account by a company as credits or debits for any period for the purposes of this Part in respect of the matters mentioned in section 594A(1) are those which are recognised in determining the company's profit or loss for the period in accordance with generally accepted accounting practice ... .

(2A) Subsections (2B) and (2C) apply if an accounting period of a company does not coincide with one or more of its periods of account.

(2B) The amounts referred to in subsection (2) are to be determined by apportionment in accordance with section 1172 of CTA 2010 (time basis).

(2C) But if it appears that apportionment in accordance with that section would work unreasonably or unjustly for an accounting period, subsection (2) is to be read as referring to amounts that would have been recognised in determining the company's profit or loss for that period in accordance with generally accepted accounting practice if accounts had been drawn up for that period.

(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(7) This section is subject to the following provisions of this Part.

(8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

596

(1) In this Part “related transaction”, in relation to a derivative contract, means any disposal or acquisition (in whole or in part) of rights or liabilities under the contract.

(2) For this purpose the cases where there is taken to be such a disposal or acquisition include—

(a) those where rights or liabilities under the derivative contract are transferred or extinguished by any sale, gift, surrender or release, and

(b) those where the contract is discharged by performance in accordance with its terms.

Amounts recognised in determining a company's profit or loss

Amounts recognised in determining a company’s profit or loss

597

(1) References in this Part to an amount recognised in determining a company's profit or loss for a period are to an amount that is recognised in the company's accounts for the period as an item of profit or loss.

(1A) The reference in subsection (1) to an amount recognised in the company's accounts for the period as an item of profit or loss includes a reference to an amount that—

(a) was previously recognised as an item of other comprehensive income, and

(b) is transferred to become an item of profit or loss in determining the company's profit or loss for the period.

(1B) In subsections (1) and (1A) “item of profit or loss” and “item of other comprehensive income” each has the meaning that it has for accounting purposes.

(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Regulations about recognised amounts

598

(1) The Treasury may by regulations make provision—

(a) excluding amounts of a specified description from section 597(1) (amounts recognised in determining a company's profit or loss),

(b) requiring amounts of a specified description which are not within section 597(1) to be brought into account in determining a company's profit or loss for a period in specified circumstances, and

(2) For the purposes of subsection (1)(b), it does not matter whether the amounts are not within section 597(1) because of regulations under subsection (1)(a) or otherwise.

(3) The regulations may (in particular) make provision by reference to the fact that amounts derive from or otherwise relate to amounts brought into account in a specified way in a previous period of account.

(4) The regulations may—

(a) make different provision for different cases, and

(b) make provision subject to an election or to other specified conditions.

(5) The regulations may apply, exclude or modify any of the provisions of this Part in relation to cases for which provision is made by the regulations.

(6) The regulations may apply to periods of account beginning before they are made, but not earlier than the beginning of the calendar year in which they are made.

Meaning of “amounts recognised for accounting purposes”

599

(1) If a company—

(a) draws up accounts which are not GAAP-compliant accounts, or

(b) does not draw up accounts at all,

this Part applies as if GAAP-compliant accounts had been drawn up.

(2) Accordingly, references in this Part to amounts recognised for accounting purposes include references to the amounts which would have been recognised if GAAP-compliant accounts had been drawn up for the period of account in question and any relevant earlier period.

(3) For this purpose a period of account is relevant to a later period if the accounts for the later period rely to any extent on amounts derived from the earlier period.

(4) In this section “GAAP-compliant accounts” means accounts drawn up in accordance with generally accepted accounting practice.

Application of fair value accounting

Contract which is or forms part of financial asset or liability

600

(1) This section applies to a derivative contract which meets the condition in section 579(1)(b) (contract which is or forms part of a financial asset or liability for accounting purposes).

(2) The amounts to be brought into account in accordance with this Part in respect of the contract are to be determined on the basis of fair value accounting.

Contract relating to holding in OEIC, unit trust or offshore fund

601

(1) This section applies if a company is a party in an accounting period to a relevant contract which is treated as a derivative contract under section 587 (contract relating to holding in OEIC, unit trust or offshore fund).

(2) The credits and debits which are to be brought into account in accordance with this Part in respect of the relevant contract are to be determined on the basis of fair value accounting.

Contract becoming one relating to holding in OEIC, unit trust or offshore fund

602

(1) This section applies if—

(a) a company is a party to a relevant contract in two successive accounting periods,

(b) section 587 (contract relating to holding in OEIC, unit trust or offshore fund) applies in relation to the relevant contract for the second accounting period but not the first accounting period, and

(2) For the purposes of section 601(2), the opening valuation of the contract as at the beginning of the second accounting period is taken to be equal to the market value of the contract.

(3) In subsection (2) “the market value of the contract” means the amount which would have been the market value of the contract for the purposes of corporation tax on chargeable gains if it had been disposed of immediately before the end of the first accounting period.

(4) For the rules which apply where the company ceases to be a party to the contract, see section 660 (company ceasing to be party to contract relating to holding in OEIC, unit trust or offshore fund).

Associated transaction treated as derivative contract

603

(1) This section is to be read as if it were in Chapter 7 (shares with guaranteed returns etc) of Part 6 (relationships treated as loan relationships etc).

(2) See, in particular, section 532(3) (meaning of “associated transaction”).

(3) Subsection (4) applies if credits and debits are required to be brought into account in accordance with this Part in respect of any associated transaction because of section 588 (which treats such a transaction which is not a derivative contract as if it were).

(4) Those credits and debits are to be determined on the basis of fair value accounting.

Rules differing from generally accepted accounting practice

Credits and debits treated as relating to capital expenditure

604

(1) This section applies if—

(a) an amount for an accounting period in respect of a company's derivative contract relates to any of the matters in section 594A(1),

(b) generally accepted accounting practice allows the amount to be treated in the company's accounts as an amount recognised in determining the carrying value of an asset or liability, and

(c) any profit or loss for corporation tax purposes in relation to that asset or liability will not fall to be calculated in accordance with generally accepted accounting practice.

(2) Despite that treatment, the amount must be brought into account as a credit or debit in accordance with this Part, for the accounting period in which it is recognised, in the same way as an amount which is brought into account as a credit or debit in determining the company's profit or loss for that period in accordance with generally accepted accounting practice.

(3) But subsection (2) does not apply to an amount which relates to an intangible fixed asset to which an election under section 730 (writing down at fixed rate: election for fixed-rate basis) applies.

(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(5) If an amount is brought into account as mentioned in subsection (2) as a debit, no debit may be brought into account in accordance with this Part in respect of—

(a) the writing down of so much of the value of the asset or liability as is attributable to that debit, or

(b) so much of any amortisation or depreciation representing a writing off of that value as is attributable to that debit.

Credits and debits recognised in equity

605

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Exchange gains and losses

606

(1) The reference in section 594A(1) to the profits and losses arising to a company from its derivative contracts includes a reference to exchange gains and losses so arising.

(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(2A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(3) But subsection (1) does not apply to an exchange gain or loss of a company so far as it—

(a) arises as a result of the translation of the assets, liabilities, income and expenses of all or part of the company's business from the functional currency of the business, or that part of the business, into another currency, and

(b) has been recognised as an item of other comprehensive income.

(3A) In subsection (3)—

(a) the reference to the functional currency of a business or part of a business is a reference to the currency of the primary economic environment in which the business or part operates, and

(b) “assets, liabilities, income and expenses” and “item of other comprehensive income” each has the meaning that it has for accounting purposes.

(3B) No amount is to be brought into account for the purposes of this Part in respect of an exchange gain or loss of an investment company (within the meaning of section 17 of CTA 2010) which would not have arisen but for a change in the company's functional currency (within the meaning of section 17(4) of that Act) as between—

(a) the period of account of the company in which the gain or loss arises, and

(b) a period of account of the company ending in the 12 months immediately preceding that period.

(3C) But subsection (3B) does not apply to an exchange gain or loss arising at a time when an election under section 9A of CTA 2010 (designated currency of UK resident investment company) has effect in relation to the company.

(4) The Treasury may by regulations make provision—

(a) excluding exchange gains or losses of a specified description from being brought into account for the purposes of this Part,

(b) requiring exchange gains or losses of a specified description which would not otherwise be brought into account for the purposes of this Part to be brought into account in specified circumstances,

(c) as to the way in which, including the currency by reference to which, any exchange gains or losses to be brought into account as a result of provision made under paragraph (b) are to be calculated, and

(d) as to the way in which any such exchange gains or losses are to be brought into account.

(4ZA) For the purposes of subsection (4)(b), it does not matter whether the exchange gains or losses would otherwise be excluded from being brought into account by regulations under subsection (4)(a) or otherwise.

(4A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(4B) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(4C) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(4D) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(4E) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(6) References in subsection (4) to bringing amounts into account are references to bringing amounts into account—

(a) for the purposes of this Part as credits or debits arising to a company from its derivative contracts, or

(b) for the purposes of corporation tax on chargeable gains.

(7) The regulations may—

(a) make different provision for different cases, and

(b) make provision subject to an election or to other specified conditions.

(8) For the meaning of references to exchange gains or losses from derivative contracts, see section 705.

Pre-contract or abortive expenses

607

(1) This section applies if—

(a) a company may enter into a derivative contract or related transaction but has not yet done so,

(b) it incurs any expenses for purposes connected—

(i) with entering into it, or

(ii) with giving effect to any obligation which might arise under it, and

(2) The expenses are treated as expenses in relation to which debits may be brought into account in accordance with section 595(2) to the same extent as if the company had entered into the contract or transaction.

Company ceasing to be party to derivative contract

608

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Company ceasing to be UK resident

609

(1) If a company ceases to be UK resident, this Part applies as if—

(a) immediately before so ceasing the company had assigned the rights and liabilities under its derivative contracts for consideration of an amount equal to their fair value at that time, and

(b) it had immediately reacquired them for consideration of the same amount.

(2) Subsection (1) does not apply in relation to a derivative contract so far as immediately after the company ceases to be UK resident its rights and liabilities under the contract are held or owed—

(a) for the purposes of a permanent establishment of the company in the United Kingdom,

(b) for the purposes of the company's trade of dealing in or developing UK land,

(d) for the purposes of enabling the company to generate other UK property income (within the meaning given by section 5(6)).

(3) Subsection (1) does not apply if—

(a) the conditions in section 630(1)(a) and (b) are met in relation to the company (transferee leaving group after replacing transferor as party to derivative contract), and

(b) it ceases to be UK resident at the same time as it ceases to be a member of the relevant group.

(4) In subsection (3) “the relevant group” has the meaning given by section 630(4).

Non-UK resident company ceasing to hold derivative contract for UK permanent establishment

610

(1) This section applies if the rights and liabilities under a derivative contract of a company which is not UK resident cease to any extent to be held or owed for section 609(2) purposes in circumstances not involving a related transaction.

(2) This Part applies as if—

(a) immediately before the rights and liabilities so cease the company had assigned them, so far as so ceasing, for consideration of an amount equal to their fair value at that time, and

(b) the company had immediately reacquired them for consideration of the same amount.

(3) This section does not apply if—

(a) the conditions in section 630(1)(a) and (b) are met in relation to the company (transferee leaving group after replacing transferor as party to derivative contract), and

(b) the rights and liabilities mentioned in subsection (1) cease to be held or owed for section 609(2) purposes at the same time as the company ceases to be a member of the relevant group.

(4) In subsection (3) “the relevant group” has the meaning given by section 630(4).

(5) A right or liability ceases to be held or owed for section 609(2) purposes if and in so far as—

(a) it ceases to be held or owed for any purposes mentioned in section 609(2), and

(b) on doing so, it does not begin or continue to be held or owed for any of the other purposes so mentioned.

Release under statutory insolvency arrangement of liability under derivative contract

611

No credit is required to be brought into account by a company in respect of the release of the company's liability to pay an amount under a derivative contract of the company if the release is part of a statutory insolvency arrangement.

Chapter 4 — Further provision about credits and debits to be brought into account

Introduction

Overview of Chapter

612

(1) This Chapter makes further provision about the credits and debits to be brought into account for the purposes of this Part.

(2) In particular, it—

(a) provides for adjustments on a change of accounting basis (see sections 613 to 615),

(b) makes provision in relation to certain embedded derivatives (see sections 616 to 618),

(d) makes provision about contracts ceasing to be derivative contracts (see section 622), and

(e) makes provision in relation to some gilt-edged securities (see section 623).

Adjustments on change of accounting basis

Introduction to sections 614 and 615

613

(1) Sections 614 and 615 (adjustments on change of accounting basis) apply if—

(a) a company changes, from one period of account or accounting period to the next, the basis of accounting on which credits and debits relating to its derivative contracts or any of them are calculated for the purposes of this Part,

(b) the change of basis—

(i) is made in order to comply with a provision made by or under this Part requiring those credits and debits to be determined on a particular basis of accounting, or

(ii) results from a change of the company's accounting policy,

(d) the old basis accorded with the law or practice applicable in relation to the period before the change, and

(e) the new basis accords with the law and practice applicable to the period after the change.

(2) In this section and those sections—

(a) the first of the periods mentioned in subsection (1) is referred to as “the earlier period”, and

(b) the next is referred to as “the later period”.

(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(4) If an election is made under section 416, this section and sections 614 and 615 apply as if there were a change of accounting policy consisting of the company treating the assets referred to in section 416(1)(c) as mentioned in section 585(1) as from the date the election has effect.

Change of accounting policy involving change of value

614

(1) If there is a difference between—

(a) the tax-adjusted carrying value of a derivative contract at the end of the earlier period, and

(b) the tax-adjusted carrying value of that derivative contract at the beginning of the later period,

a credit or debit (as the case may be) of an amount equal to the difference must be brought into account for the purposes of this Part for the later period in the same way as a credit or debit which is brought into account in determining the company's profit or loss for that period in accordance with generally accepted accounting practice.

(2) This section does not apply so far as the credit or debit falls to be brought into account apart from this section.

Change of accounting policy after ceasing to be party to derivative contract

615

(1) This section applies if—

(a) the company has ceased to be a party to a derivative contract in an accounting period (“the cessation period”),

(b) section 607A (company is not, or has ceased to be, party to derivative contract) applied to the cessation, and

(i) at the end of the earlier period, and

(ii) at the beginning of the later period.

(2) A credit or debit (as the case may be) of an amount equal to the difference must be brought into account for the purposes of this Part for the later period in the same way as a credit or debit which is brought into account in determining the company's profit or loss for that period in accordance with generally accepted accounting practice.

(4) Subsection (2) does not apply so far as the credit or debit falls to be brought into account apart from this section.

(5) In this section “the amount outstanding in respect of the derivative contract” means—

(a) so much of the recognised deferred income or recognised deferred loss from the derivative contract as has not been represented by credits or debits brought into account in accordance with this Part in respect of the contract, and

(b) any amounts relating to the matters mentioned in section 594A(1) in respect of the derivative contract that have in accordance with generally accepted accounting practice been recognised in the company's accounts as items of other comprehensive income and not transferred to become items of profit or loss.

(6) In subsection (5)—

“recognised deferred income”, in relation to a derivative contract, means the amount recognised in the company's balance sheet in accordance with generally accepted accounting practice as deferred income in respect of the profits which arose from the contract or a related transaction in the cessation period, and

“recognised deferred loss”, in relation to a derivative contract, means the amount so recognised as deferred loss in respect of the losses which so arose.

(7) In determining what amounts fall within subsection (5)(b) at the beginning or end of a period, it is to be assumed that the accounting policy applied in drawing up the company's accounts for the period was also applied in previous periods.

(8) But if the company's accounts for the period are in accordance with generally accepted accounting practice drawn up on an assumption as to the accounting policy in previous periods which differs from that mentioned in subsection (7), that different assumption applies in determining what amounts fall within subsection (5)(b) at the beginning or end of the period.

Certain embedded derivatives

Disapplication of fair value accounting

616

(1) This section applies if—

(a) a company is treated as a party to a relevant contract under section 584(2)(a) or 586(2) (“the embedded derivative”),

(b) the embedded derivative is a derivative contract which meets the condition in section 579(1)(a) (contract treated for accounting purposes as derivative),

(c) section 592 (embedded derivatives treated as meeting condition in section 591 etc) does not apply in relation to the embedded derivative, and

(d) regulation 9 of the Disregard Regulations (interest rate contracts) does not apply to the embedded derivative.

(2) If this section applies—

(a) sections 573 and 574 (trading credits and debits to be brought into account under Part 3 and non-trading credits and debits to be brought into account under Part 5) do not apply in relation to the embedded derivative, and

(b) subsection (3) or subsections (4) to (6) apply in relation to the original contract, depending on whether that contract is a hybrid derivative or a contract within section 586(1).

(3) If the original contract is a hybrid derivative, profits and losses are to be calculated for the purposes of this Part as if that contract—

(a) were not one where the rights and liabilities are treated for accounting purposes as divided as mentioned in section 584(1) (hybrid derivatives with embedded derivatives), and

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

(4) If the original contract is a contract within section 586(1), 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 for accounting purposes as divided as mentioned in section 586(1) (other contracts with embedded derivatives), and

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

(5) Accordingly, this Part does not apply to the original contract (except for the purposes of this section), but section 46 applies to that contract as if fair value accounting were not generally accepted accounting practice in relation to the company.

(6) Subsections (4) and (5) apply despite section 699(1) (priority of this Part for corporation tax purposes).

(7) In this section—

“the Disregard Regulations” means the Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) Regulations 2004 (S.I. 2004/3256), and

“the original contract” means—the hybrid derivative as a result of which the company falls to be treated under section 584(2) (hybrid derivatives with embedded derivatives) as a party to the embedded derivative, orthe contract within section 586(1) (other contracts with embedded derivatives) as a result of which the company falls to be treated under section 586(2) as a party to the embedded derivative.

Election for section 616 not to apply

617

(1) A company may elect that section 616 is not to apply in relation to its contracts.

(2) But such an election does not apply to a contract if—

(a) the contract is a contract of long-term insurance, or

(b) the underlying subject matter of the embedded derivative is, or includes, commodities.

(3) An election under this section—

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

(b) is irrevocable.

(4) In subsection (3) “the first applicable accounting period” means the first accounting period in which the conditions in section 616(1) are met.

(5) Section 618 makes further provision about elections under this section.

Elections under section 617: groups of companies

618

(1) If—

(a) a company makes an election under section 617 in relation to its contracts, and

(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,

the other company is treated, in relation to that contract, as if it had also made such an election.

(2) If—

(a) a company (“the electing company”) makes an election under section 617 in relation to its contracts,

(b) another company (“the transferee”) becomes a party to a contract to which section 584 (hybrid derivatives with embedded derivatives) or section 586 (other contracts with embedded derivatives) applies, in place of the electing company (whether before or after the election is made), and

the transferee is treated, in relation to the contract mentioned in paragraph (b), as if it had also made such an election.

(3) If—

(a) a company (“A”) is treated under section 584 or 586 as a party to a relevant contract in relation to which section 616(1) applies,

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

(d) section 616(1) does not apply in relation to B's other relevant contracts because of an election under section 617 (whenever made),

subsection (4) applies, unless A, subsequent to B's becoming a party to the contract, makes such an election.

(4) B is treated, in relation to the contract mentioned in subsection (3)(b), as if section 616(1) applied in relation to it.

(5) In this section, references to a company being a member of the same group of companies are to be read in accordance with section 170 of TCGA 1992 (interpretation of sections 171 to 181 of that Act: groups).

Partnerships involving companies

619

(1) This section applies if—

(a) a trade or business is carried on by a firm,

(b) any of the partners in the firm is a company (a “company partner”), and

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

(2) No credits or debits may be brought into account in accordance with this Part in respect of the contract in calculating the profits and losses of the trade or business for corporation tax purposes under section 1259 (calculation of firm's profits and losses).

(3) Instead, each company partner must bring into account in accordance with this Part credits and debits in respect of the contract for each of its accounting periods in which the conditions in subsection (1) are met.

(4) Sections 620 (determination of credits and debits by company partners) and 621 (company partners using fair value accounting) contain special rules about the credits and debits to be brought into account under subsection (3).

(5) In sections 620 and 621 “company partner” has the same meaning as in this section.

Determination of credits and debits by company partners

620

(1) The credits and debits to be brought into account under section 619(3) are to be determined separately for each company partner as follows.

(2) The contract entered into or acquired by the firm is treated as if it were instead entered into or acquired by the company partner for the purposes of the trade or business which the company partner carries on.

(3) Anything done by or in relation to the firm in connection with the contract is treated as done by or in relation to the company partner.

(4) So far as exchange gains or losses arising from the contract are recognised in the firm's—

(a) statement of total recognised gains and losses,

(b) statement of recognised income and expense,

(d) statement of income and retained earnings,

they are treated as if they had been recognised in the corresponding statement of the company partner.

(5) The credits and debits in the case of each company partner are the partner's appropriate share of the total credits and debits determined in accordance with subsections (2) to (4).

(6) A company partner's “appropriate share” is the share which would be apportioned to it on the assumption in subsection (7).

(7) The assumption is that the total credits and debits determined in accordance with subsections (2) to (4) are apportioned between the partners in the shares in which any profit or loss would be apportioned between them in accordance with the firm's profit-sharing arrangements.

Company partners using fair value accounting

621

(1) This section applies if a company partner uses fair value accounting in relation to its interest in the firm.

(2) The credits and debits to be brought into account by the company partner under section 619(3) are to be determined on the basis of fair value accounting.

Miscellaneous

Contracts ceasing to be derivative contracts

622

(1) This section applies if a company is a party to a relevant contract which ceases to be a derivative contract.

(2) The company is treated for the purposes of this Part as if it had disposed of the contract in a related transaction at the relevant time for consideration of an amount equal to the notional carrying value of the contract at that time.

(3) In this section “the relevant time” means the time when the contract ceases to be a derivative contract.

(4) For the purposes of this section, the “notional carrying value” of the contract at the relevant time is the amount which would have been the tax-adjusted carrying value of the contract based on the accounts of the company if a period of account had ended immediately before that time.

(5) See also section 662 (chargeable gains provision for contracts ceasing to be derivative contracts).

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

623

(1) This section applies to a derivative contract of a company for an accounting period if each of conditions A to D is met.

(2) Condition A is that the derivative contract is a relevant contract to which the company is treated as a party under section 585(2) (loan relationships with embedded derivatives) because of a creditor relationship of the company.

(3) Condition B is that the derivative contract is treated as a contract for differences by section 585(3) (contract treated as option, future or contract for differences).

(4) Condition C is that the creditor relationship is an index-linked gilt-edged security.

(5) Condition D is that the credits and debits which fall to be brought into account for the accounting period for the purposes of Part 5 (loan relationships) in respect of the host contract are non-trading credits and non-trading debits.

(6) The credits and debits which would fall to be brought into account in accordance with this Part in respect of the derivative contract for the accounting period apart from this section may not be so brought into account.

(7) In this section—

“the host contract” means the loan relationship to which the company is treated as a party under section 415(2) (loan relationships with embedded derivatives) because of the creditor relationship mentioned in subsection (2), and

“index-linked gilt-edged security” has the same meaning as in Part 5 (see section 399(4)).

Chapter 5 — Continuity of treatment on transfers within groups

Introductory

Introduction to Chapter

624

(1) This Chapter makes provision—

(a) about continuity of treatment in some cases in which a company replaces a member of the same group of companies as a party to a derivative contract, and

(b) about cases in which the company ceases to be a member of the group.

(2) For the meaning of references in this Chapter to a company replacing another as a party to a derivative contract, see section 627.

(3) In this Chapter, references to a company being a member of a group of companies are to be read in accordance with section 170 of TCGA 1992 (interpretation of sections 171 to 181 of that Act: groups).

(4) For modifications of this Chapter for insurance companies, see section 636.

Group member replacing another as party to derivative contract

625

(1) This section applies if—

(a) there is a transaction within section 626(2) or a series of transactions within section 626(3),

(b) as a result one of the companies involved (“the transferee”) directly or indirectly replaces the other (“the transferor”) as a party to a derivative contract.

(2) The credits and debits to be brought into account in accordance with this Part in respect of the derivative contract are determined in accordance with subsections (3) to (5).

(3) For the accounting period in which the transaction or, as the case may be, the first of the transactions takes place, the transferor is treated as having entered into that transaction for consideration of an amount equal to the notional carrying value of the contract (see subsection (6)).

(4) For any accounting period in which the transferee is a party to the contract, it is treated as if it had acquired the contract for consideration of an amount equal to its notional carrying value.

(5) If a discount arises in respect of the transaction or series of transactions, the consideration is increased for the purposes of subsection (3) (but not subsection (4)) by the amount of the discount.

(6) For the purposes of this section—

(a) “discount” has same meaning as in section 480 (relevant non-lending relationships involving discounts), and

(b) the notional carrying value of a contract is the amount which would have been its tax-adjusted carrying value based on the accounts of the transferor if a period of account had ended immediately before the date when the transferor ceased to be a party to the contract.

(7) Part 4 of TIOPA 2010 (provision not at arm's length) does not apply in relation to the amounts in respect of which credits or debits are to be brought into account under this section.

(8) This section is subject to sections 628 (transferor using fair value accounting) and 629 (tax avoidance).

Transactions to which section 625 applies

626

(1) This section applies for the purposes of section 625(1)(a).

(2) A transaction is within this subsection if it is a related transaction between two companies which are—

(a) members of the same group, and

(b) within the charge to corporation tax in respect of that transaction.

(3) A series of transactions is within this subsection if it is a series of transactions having the same effect as a related transaction between two companies each of which—

(a) has been a member of the same group at any time in the course of that series of transactions, and

(b) would be within the charge to corporation tax in respect of such a related transaction.

Meaning of company replacing another as party to derivative contract

627

(1) References in this Chapter to one company (“A”) replacing another company (“B”) as a party to a derivative contract include references to A becoming a party to a derivative contract which—

(a) confers rights within subsection (2),

(b) imposes liabilities within subsection (2), or

(2) Rights or liabilities are within this subsection if they are equivalent to those of B under a derivative contract to which B has previously ceased to be a party.

Exceptions to section 625

Transferor using fair value accounting

628

(1) This section applies instead of section 625 if, in a case where that section would otherwise apply, the transferor uses fair value accounting as respects the derivative contract.

(2) The amount which is to be brought into account by the transferor in respect of—

(a) the transaction mentioned in that section, or

(b) the series of transactions mentioned in that section taken together,

is the fair value of the derivative contract as at the date of transfer to the transferee.

(3) For any accounting period in which the transferee is a party to the contract, for the purpose of determining the credits and debits to be brought into account in respect of the contract in accordance with this Part, the transferee is treated as if it had acquired the contract for consideration of an amount equal to the fair value of the contract as at the date of transfer to it.

(4) If a discount arises in respect of the transaction or series of transactions, the amount to be brought into account under subsection (2) is increased by the amount of the discount.

(5) In this section—

“discount” has the same meaning as in section 480 (relevant non-lending relationships involving discounts), and

“the transferor” and “the transferee” have the same meaning as in section 625.

Tax avoidance

629

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Transferee leaving group after replacing transferor as party to derivative contract

Introduction to sections 631 and 632

630

(1) Sections 631 and 632 apply if—

(a) section 625 (group member replacing another as party to derivative contract) applies because of a transaction or series of transactions within section 626(2) or (3), and

(b) before the end of the relevant 6 year period and while still a party to the relevant derivative contract, the transferee ceases to be a member of the relevant group.

(2) But the transferee is not to be treated for the purposes of this section and sections 631 and 632 as having left the relevant group if—

(a) rights and liabilities under a derivative contract are transferred in the course of a transfer or merger in relation to which Chapter 9 (European cross-border transfers of business) or Chapter 10 (European cross-border mergers) applies, and

(b) the transferee ceases to be a member of the relevant group in consequence of the transfer or merger.

(3) In a case where subsection (2) applies, if the transferee becomes a member of another group in consequence of the transfer or merger, it is to be treated for the purposes of this section and sections 631 and 632 as if the relevant group and the other group were the same.

(4) In this section and sections 631 and 632—

“the relevant 6 year period” means the period of 6 years following—in a case where section 625 applies because of a transaction within section 626(2) (“case A”), that transaction, orin a case where section 625 applies because of a series of transactions within section 626(3) (“case B”), the last transaction of that series,

“the relevant derivative contract” means the derivative contract mentioned in section 625(1),

“the relevant group” means—in case A, the group mentioned in section 626(2),in case B, the group mentioned in section 626(3), and

“the transferee” has the same meaning as in section 625.

Transferee leaving group otherwise than because of exempt distribution

631

(1) This section applies if—

(a) the transferee ceases to be a member of the relevant group, and

(b) it does not so cease just because of a distribution which is exempt as a result of section 1075 of CTA 2010 (exempt distributions).

(2) ... This Part applies as if—

(a) the transferee had assigned its rights and liabilities under the relevant derivative contract immediately before so ceasing,

(b) the assignment had been for consideration of an amount equal to their fair value at that time, and

(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Transferee leaving group because of exempt distribution

632

(1) This section applies if—

(a) the transferee ceases to be a member of the relevant group just because of a distribution which is exempt as a result of section 1075 of CTA 2010 (exempt distributions), and

(b) there is a chargeable payment within the meaning of section 1088(1) of CTA 2010 (chargeable payments connected with exempt distributions) within 5 years after the making of the distribution.

(2) ... This Part applies as if—

(a) the transferee had assigned its rights and liabilities under the relevant derivative contract immediately before that chargeable payment was made,

(b) the assignment had been for consideration of an amount equal to their fair value immediately before the transferee ceased to be a member of the relevant group, and

(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Chapter 6 — Special kinds of company

Mutual trading companies

633

For the purposes of this Part, activities carried on by a company in the course of any mutual trading are treated as not constituting the whole or any part of a trade.

Insurance companies

634

(1) For the purposes of this Part, activities carried on by a company in the course of—

(a) any mutual insurance or other mutual business which is not life assurance business, ...

(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

are treated as not constituting the whole or any part of a trade.

(2) In the case of activities carried on by a company in the course of any basic life assurance and general annuity business, provision corresponding to that made by subsection (1) is made by section 88 of FA 2012 for the purpose of applying the I - E rules.

Creditor relationships: embedded derivatives which are options

635

(1) This section applies if in any accounting period—

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

(b) that creditor relationship is one in relation to which sections 415 and 585 (which both apply to loan relationships with embedded derivatives) would have effect but for the fact that the company accounts for the creditor relationship at fair value through profit and loss.

(2) For the purpose of applying the I - E rules, this Part and Part 5 (loan relationships) have effect for that accounting period as they would if the creditor relationship were one in relation to which those sections have effect.

Modifications of Chapter 5

636

(1) Chapter 5 (continuity of treatment on transfers within groups) has effect in relation to insurance companies with the following modifications.

(2) Section 625(1)(a) (which sets out one of the conditions for that section to apply) has effect as if for “section 626(2)” there were substituted “section 626(2), (2A) or (2B)”.

(3) Section 626 (transactions to which section 625 applies) has effect as if after subsection (2) there were inserted—

(2A) A transaction is within this subsection if it is a transfer between two companies of business consisting of the effecting or carrying out of contracts of long-term insurance which has effect under an insurance business transfer scheme. (2B) A transaction is within this subsection if it is a transfer between two companies which is a qualifying overseas transfer. (2C) In subsection (2B) “qualifying overseas transfer” means so much of a transfer of the whole or any part of the business of an overseas life insurance company carried on through a permanent establishment in the United Kingdom as takes place in accordance with an authorisation granted outside the United Kingdom for the purposes of Article 39 of Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II).

(4) Section 625 (group member replacing another as party to derivative contract) does not apply as a result of a transaction or series of transactions within section 626(2) or (3) in relation to a transfer of an asset, or of rights or duties under or an interest in an asset, if, immediately before or after the transfer, the asset was held for the purposes of a company's long-term business (but, in the case of an overseas life insurance company, ignoring assets which are not UK assets (within the meaning of section 117 of FA 2012)).

(5) Section 625 does not apply as a result of a transaction within section 626(2A) or (2B) in relation to a transfer of an asset, or of rights or duties under or an interest in an asset, if the asset—

(a) was within one of the applicable categories immediately before the transfer, and

(b) is not within that category immediately after it.

(5A) For the purposes of subsection (5)(a) “the applicable categories” means—

(a) in the case of a UK life insurance company, the long-term business categories or a category of assets which are not held for the purposes of its long-term business, and

(b) in the case of an overseas life insurance company, the UK long-term business categories, a category of UK assets which are not held for the purposes of its long-term business or a category of assets which are held by it but which are not UK assets.

(6) Subsection (7) applies for the purposes of subsection (5) if one of the companies is an overseas life insurance company.

(7) An asset is taken to be within the same category both immediately before the transfer and immediately after it if the asset—

(a) was within one category immediately before the transfer, and

(b) is within the corresponding category immediately after it.

(8) For the purposes of this section—

(a) “the long-term business categories” has the same meaning as in section 116 of FA 2012, and “the UK long-term business categories” and “UK assets” have the same meanings as in section 117 of FA 2012, and

(b) section 122 of FA 2012 applies as it applies for the purposes of Chapter 8 of Part 2 of that Act.

Investment and venture capital trusts

Investment trusts: profits or losses of a capital nature

637

(1) Profits or losses of a capital nature arising to an investment trust from a derivative contract may not be brought into account as credits or debits in accordance with this Part.

(2) For the purposes of this section, “profits or losses of a capital nature” means profits or losses which—

(a) are accounted for through the capital column of the income statement in accordance with the Statement of Recommended Practice, or

(b) would have been so accounted for if that Statement had been applied correctly.

(3) “The Statement of Recommended Practice”, in relation to an accounting period for which it is required or permitted to be used, means—

(a) the Statement of Recommended Practice relating to Investment Trust Companies, issued by the Association of Investment Trust Companies in January 2003, as from time to time modified, amended or revised, or

(b) any subsequent Statement of Recommended Practice relating to investment trusts, as from time to time modified, amended or revised.

(4) The Treasury may by order amend the definition of “profits or losses of a capital nature” in subsection (2), so far as it applies in relation to an investment trust which prepares accounts in accordance with international accounting standards.

Venture capital trusts: profits or losses of a capital nature

638

(1) Profits or losses of a capital nature arising to a venture capital trust from a derivative contract may not be brought into account as credits or debits in accordance with this Part.

(2) For the purposes of this section, “profits or losses of a capital nature” means profits or losses which—

(a) are accounted for through the capital column of the income statement in accordance with the Statement of Recommended Practice, or

(b) would have been so accounted for if the venture capital trust had been an investment trust and that Statement had been applied correctly.

(3) In this section “the Statement of Recommended Practice” has the meaning given by section 637(3) (investment trusts: profits or losses of a capital nature).

(4) The Treasury may by order amend the definition of “profits or losses of a capital nature” in subsection (2), so far as it applies in relation to a venture capital trust which prepares accounts in accordance with international accounting standards.

Chapter 7 — Chargeable gains arising in relation to derivative contracts

Introduction

Overview of Chapter

639

(1) This Chapter makes provision about cases in which—

(a) credits and debits are not to be brought into account in accordance with section 574 (non-trading credits and debits to be brought into account under Part 5: loan relationships) (see sections 640 and 643 to 650), but

(b) instead profits arising to a company from its derivative contracts are chargeable to corporation tax as chargeable gains (see sections 641 to 650).

(2) This Chapter also makes provision about cases in which—

(a) credits and debits are not to be brought into account in accordance with section 573 (trading credits and debits to be brought into account under Part 3: trading income) or section 574 (non-trading credits and debits to be brought into account under Part 5: loan relationships) (see section 651), but

(b) instead provisions relating to corporation tax on chargeable gains apply in relation to derivative contracts (see sections 652 to 658).

Some credits and debits not to be brought into account under Part 5

Credits and debits not to be brought into account under Part 5

640

(1) If any of the provisions in subsection (2) applies to a derivative contract of a company for an accounting period, section 574 (non-trading credits and debits to be brought into account under Part 5: loan relationships) does not apply to the relevant credits and debits.

(2) The provisions are—

(a) section 643 (contracts relating to land or certain tangible movable property),

(b) section 645 (creditor relationships: embedded derivatives which are options),

(d) section 650 (property based total return swaps).

(3) For the meaning of “relevant credits” and “relevant debits”, see section 659.

(4) For the treatment of the relevant credits and debits in the case of a derivative contract to which section 643, 645, 648 or 650 applies, see section 641 (derivative contracts to be taxed on a chargeable gains basis).

Some derivative contracts to be taxed on a chargeable gains basis

Derivative contracts to be taxed on a chargeable gains basis

641

(1) This section applies to a derivative contract of a company for an accounting period if any of the provisions in subsection (2) applies to the derivative contract for the period.

(2) The provisions are—

(a) section 643 (contracts relating to land or certain tangible movable property),

(b) section 645 (creditor relationships: embedded derivatives which are options),

(d) section 650 (property based total return swaps).

(3) For the purposes of corporation tax on chargeable gains—

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

(b) if D exceeds C, an allowable loss equal to the amount of the excess is treated as accruing to the company in the accounting period.

(4) “C” means the sum of the relevant credits for the accounting period in respect of the derivative contract.

(5) “D” means the sum of the relevant debits for the accounting period in respect of the derivative contract.

(6) For a case in which this section does not apply, see section 642.

(7) See also section 663 (carry back of net losses on derivative contracts to which this section applies).

Exception from section 641

642

(1) Section 641 does not apply to a derivative contract to which section 645 applies if, on the assumptions in subsection (2), paragraph 2 of Schedule 7AC to TCGA 1992 (substantial shareholding exemptions: gain on disposal of asset related to shares not a chargeable gain) would apply to the gain mentioned in subsection (2)(d).

(2) Those assumptions are that—

(a) the rights and liabilities treated as comprised in the derivative contract were contained in a separate contract,

(b) that separate contract was an option,

(d) a gain accrued to the company on the disposal for the purposes of corporation tax on chargeable gains.

Derivative contracts to which sections 640 and 641 apply

Contracts relating to land or certain tangible movable property

643

(1) This section applies to a derivative contract of a company for an accounting period if conditions A, B , C and D are met.

(2) Condition A is that the underlying subject matter of the derivative contract consists of either or both of the following—

(a) land,

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

(3) Condition B is that the company is not a party to the derivative contract at any time in the accounting period for the purposes of a trade carried on by it.

(4) Condition C is that the company is not an excluded body.

(4A) Condition D is that no two or more of the parties to the derivative contract are connected persons.

(5) For the case where the underlying subject matter of a derivative contract also includes income from property within subsection (2)(a) or (b), see section 644.

Income to be left out of account in determining whether section 643 applies

644

(1) This section applies if the underlying subject matter of a derivative contract includes income from property within section 643(2)(a) or (b).

(2) If that income is subordinate income, it is left out of account in determining for the purposes of section 643 whether condition A is met.

(3) Income is “subordinate income” if it is—

(a) subordinate in relation to so much of the underlying subject matter of the derivative contract as consists of property within section 643(2)(a) or (b), or

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

(4) For the purposes of this section, 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.

Creditor relationships: embedded derivatives which are options

645

(1) This section applies to a derivative contract of a company for an accounting period if each of conditions A to E is met.

(2) Condition A is that the derivative contract is a relevant contract to which the company is treated as a party under section 585(2) (loan relationships with embedded derivatives) because of a creditor relationship of the company.

(3) Condition B is that the derivative contract is treated as an option by section 585(3) (contract treated as option, future or contract for differences).

(4) Condition C is that the underlying subject matter of the derivative contract—

(a) is qualifying ordinary shares, or

(b) is mandatorily convertible preference shares.

(5) Condition D is that the company is not a party to the creditor relationship at any time in the accounting period for the purposes of a trade carried on by it.

(6) Condition E is that the company is not an excluded body.

(7) Where this section applies to a derivative contract, the asset representing the creditor relationship is treated for corporation tax purposes as not being a qualifying corporate bond.

(8) See also—

(a) section 647 (meaning of certain expressions in this section), and

(b) section 670 (treatment of net gains and losses on exercise of option).

Exclusions from section 645

646

(1) Section 645 does not apply to a derivative contract of a company for an accounting period if condition A or B is met in the period.

(2) Condition A is that the rights and liabilities which 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 asset representing the creditor relationship mentioned in section 645(2), or

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

(3) Condition B is that the rights and liabilities which 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.

Meaning of certain expressions in section 645

647

(1) This section applies for the purposes of section 645.

(2) “Mandatorily convertible preference shares” means shares which—

(a) represent the creditor relationship mentioned in section 645(2),

(b) are not qualifying ordinary shares, and

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

(3) In subsection (2) “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.

(4) “Qualifying ordinary shares” means shares in a company which satisfy conditions A and B.

(5) Condition A is that the shares are all or part of the issued share capital (however described) of the 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 the 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 the company.

(6) Condition B 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 subsection (6) “holding company” and “trading company” have the same meaning as in section 165 of TCGA 1992 (see section 165A of that Act).

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

648

(1) This section applies to a derivative contract of a company for an accounting period if each of conditions A to F is met.

(2) Condition A is that the derivative contract is a relevant contract to which the company is treated as a party under section 585(2) (loan relationships with embedded derivatives) because of a creditor relationship of the company.

(3) Condition B is that the derivative contract is treated as a contract for differences by section 585(3) (contract treated as option, future or contract for differences).

(4) Condition C is that the derivative contract is an exactly tracking contract.

(5) Condition D is that the underlying subject matter of the derivative contract is qualifying ordinary shares listed on a recognised stock exchange.

(6) Condition E is that the company is not a party to the creditor relationship at any time in the accounting period for the purposes of a trade carried on by it.

(7) Condition F is that the company is not an excluded body.

(8) Where this section applies to a derivative contract, the asset representing the creditor relationship is treated for corporation tax purposes as not being a qualifying corporate bond.

(9) See also section 672 (treatment of net gains and losses on disposal of certain embedded derivatives).

Meaning of certain expressions in section 648

649

(1) This section applies for the purposes of section 648.

(2) “Exactly tracking contract” means a contract where the amount which is to be paid to discharge the rights and liabilities which fall to be treated as comprised in the contract is equal to the amount found by applying R% to C, where—

R% is 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, or(b) any index of the value of those assets, and

C is the amount falling to be regarded in accordance with generally accepted accounting practice as the cost of the asset representing the creditor relationship mentioned in section 648(2) on the date when that asset came into existence.

(3) In subsection (2) “the relevant period” means—

(a) the period between—

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

(ii) the date when the debtor relationship corresponding to that creditor relationship comes to an end, or

(b) any other period in which almost all of that period falls, and which differs from that period only for purposes connected with giving effect to a valuation in relation to rights or liabilities under that asset.

(4) “Qualifying ordinary shares” means shares in a company which are all or part of the issued share capital (however described) of the 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 the 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 the company.

Property based total return swaps

650

(1) This section applies to a derivative contract of a company for an accounting period if each of conditions A to H is met.

(2) Condition A is that the derivative contract is a contract for differences.

(3) Condition B is that one or more indices are specified in the contract.

(4) Condition C is that at least one index so specified (“the capital value index”) is an index of changes in the value of land.

(5) Condition D is that the underlying subject matter of the derivative contract also includes interest rates.

(6) Condition E is that the company is not a party to the derivative contract at any time in the accounting period for the purposes of a trade carried on by it.

(7) Condition F is that the company is not an excluded body.

(8) Condition G is that no two or more of the parties to the derivative contract are connected persons.

(9) Condition H is that the securing of a tax advantage is neither the main purpose, nor one of the main purposes, for which the company is a party to the derivative contract.

“Tax advantage” has the meaning given by section 1139 of CTA 2010.

Some credits and debits not to be brought into account under Part 3 or 5

Credits and debits not to be brought into account under Part 3 or Part 5

651

(1) If the provisions in subsection (2)(a) or (b) apply to a derivative contract for an accounting period, sections 573 (trading credits and debits to be brought into account under Part 3: trading income) and 574 (non-trading credits and debits to be brought into account under Part 5: loan relationships) do not apply to the relevant credits and debits.

(2) The provisions are—

(a) sections 653 to 655 (issuers of securities with embedded derivatives: deemed options), and

(b) section 658 (issuers of securities with embedded derivatives: deemed contracts for differences).

(3) For the cases in which sections 653 to 655 and section 658 apply, see sections 652 and 656 respectively.

(4) For the provision which applies where sections 653 to 655 or 658 apply, see those sections.

Issuers of securities with embedded derivatives: deemed options

Introduction to sections 653 to 655

652

(1) Sections 653 to 655 apply to a derivative contract of a company for an accounting period if each of conditions A to E is met.

(2) Condition A is that the derivative contract is a relevant contract to which the company is treated as a party under section 585(2) (loan relationships with embedded derivatives) because of a debtor relationship of the company.

(3) Condition B is that the derivative contract is treated as an option by section 585(3) (contract treated as option, future or contract for differences).

(4) Condition C is that the underlying subject matter of the derivative contract is shares.

(5) Condition D is that at the time when the company became a party to the debtor relationship—

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

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

(6) Condition E is that the company is not an excluded body.

(7) In this section “option” is to be construed as if section 580(2) and (3) (meaning of “option”) were omitted.

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Corporation Tax Act 2009

Associated transaction treated as derivative contract

588

Exclusions from derivative contracts

Contracts excluded because of underlying subject matter: general

589

Disregard of subordinate or small value underlying subject matter

590

Conditions A to E mentioned in section 589(5)

591

Embedded derivatives treated as meeting condition in section 591 etc

592

Contracts where part of underlying subject matter is excluded property

593

Chapter 3 — Credits and debits to be brought into account: general

Introduction

Overview of Chapter

594

General principles

General principles about the bringing into account of credits and debits

595

Meaning of “related transaction”

596

Amounts recognised in determining a company's profit or loss

Amounts recognised in determining a company’s profit or loss

597

Regulations about recognised amounts

598

Meaning of “amounts recognised for accounting purposes”

599

Application of fair value accounting

Contract which is or forms part of financial asset or liability

600

Contract relating to holding in OEIC, unit trust or offshore fund

601

Contract becoming one relating to holding in OEIC, unit trust or offshore fund

602

Associated transaction treated as derivative contract

603

Rules differing from generally accepted accounting practice

Credits and debits treated as relating to capital expenditure

604

Credits and debits recognised in equity

605

Exchange gains and losses

Exchange gains and losses

606

Pre-contract or abortive expenses

607

Company ceasing to be party to derivative contract

608

Company ceasing to be UK resident

609

Non-UK resident company ceasing to hold derivative contract for UK permanent establishment

610

Release under statutory insolvency arrangement of liability under derivative contract

611

Chapter 4 — Further provision about credits and debits to be brought into account

Introduction

Overview of Chapter

612

Adjustments on change of accounting basis

Introduction to sections 614 and 615

613

Change of accounting policy involving change of value

614

Change of accounting policy after ceasing to be party to derivative contract

615

Certain embedded derivatives

Disapplication of fair value accounting

616

Election for section 616 not to apply

617

Elections under section 617: groups of companies

618

Partnerships involving companies

Partnerships involving companies

619

Determination of credits and debits by company partners

620