Commentary on Sections Overview Chapter 4: Further provision about credits and debits to be brought into account Section 622: Contracts ceasing to be derivative contracts
1701.This section provides that, if a relevant contract to which the company continues to be a party ceases to be a derivative contract, there is a deemed disposal of the contract at the time of that cessation. It is based on paragraphs 43A(5) and 43B of Schedule 26 to FA 2002.
1702.Subsection (2) deems the company to have disposed of the contract in a “related transaction” (defined in section 596) for consideration equal to the “notional carrying value” of the contract at the time it ceases to be a derivative contract. Depending on the amount of the consideration attributed to that disposal under this subsection, a credit or debit arises to be brought into account under this Part. That credit or debit is additional to any other credit or debit that arises in relation to the contract, while it was a derivative contract, for the accounting period in which the deemed disposal occurs. “Carrying value” is defined in section 702.
1703.The source legislation for subsection (4) refers to the amount that would have been the carrying value of the contract in the accounts of the company “if an accounting period had ended immediately before that time”. The source legislation for the equivalent definition in section 625(6), paragraph 28(3) of Schedule 26 to FA 2002, refers to the value found “if a period of account had ended immediately before” the requisite time. But, if a period of account comes to an end, that is the end of an accounting period under section 10. The two definitions have been brought into line using “period of account”.
1704.After the contract ceases to be a derivative contract, it is likely to be a chargeable asset for the purposes of corporation tax on chargeable gains. Subsection (5) therefore signposts section 662 which prescribes the acquisition cost of the contract for that purpose.