Annex 1: Minor Changes in the Law Change 63: Derivative contracts: amendment of references to a “relevant holding” in a collective investment scheme in relation to certain relevant contracts treated as derivative contracts: sections 587 and 601
This change clarifies the meaning of references to a “relevant holding” in unit trust schemes, open-ended investment companies and offshore funds in determining whether a relevant contract is a derivative contract.
Paragraph 36 of Schedule 26 to FA 2002 treats as a derivative contract a relevant contract to which a company is a party in an accounting period, that is not otherwise a derivative contract for the purposes of that Schedule, if its “underlying subject matter consists wholly or partly of a holding which is, in that period, a relevant holding”. The paragraph does not directly define “relevant holding” for the purposes of this rule. Instead, paragraph 36(3) of that Schedule provides that “for the purposes of this paragraph a person holds a relevant holding in an accounting period if, at any time in that period, he holds…” and there follows a list of what such a holding may comprise. The reference here to a “person” is at odds with the reference in paragraph 36(1)(b) of that Schedule to a holding of which the underlying subject matter of a relevant contract consists.
The source legislation was modelled on a similar provision for loan relationships (see paragraph 4(1) of Schedule 10 to FA 1996). The reference there is to a holding held by a company. In adopting the model in paragraph 4 of Schedule 10 to FA 1996, the reference to a holding of a legal person was retained in error.
Section 587(3), which rewrites paragraph 36(3) of Schedule 26 to FA 2002, gives a meaning of “relevant holding”, for the purposes of subsection (1) of that section, that brings matters back into alignment. It defines the case where “the underlying subject matter of a contract consists wholly or partly of a relevant holding in an accounting period”. That wording matches the phrase “its underlying subject matter consists wholly or partly of a relevant holding in that period” in subsection (1).
This change also applies to section 601, which determines the accounting basis to be used in determining the credits and debits to be brought into account in relation to a relevant holding mentioned in section 587.
This change provides a clarification of the law which is in principle adverse to some taxpayers and favourable to others. But it is expected to have no practical effect as it is in line with generally accepted practice.