Commentary on Sections Overview
1489.This Part deals with profits and losses arising to a company from its derivative contracts. It is based on Schedule 26 to FA 2002.
1490.In most cases, the company’s accounts treatment of its derivatives is followed in identifying and quantifying the credits and debits which make up profits and losses in respect of its derivative contracts for tax purposes.
1491.If the contract is held for the purposes of a company’s trade, credits and debits arising from it are treated as receipts and expenses in calculating the profits of the trade under Part 3 of this Act. If it is not so held, the credits and debits are brought into account under Part 5 of this Act (loan relationships) in determining whether the company has non-trading profits or a non-trading deficit from its loan relationships. But, in a number of cases (primarily if the underlying subject matter of the derivative contract is land or shares), credits and debits are instead treated as giving rise to chargeable gains or allowable losses for the purposes of TCGA.
1492.There are similarities between many of the core rules for derivative contracts and those for loan relationships. The arrangement and drafting of the provisions for such common rules in Parts 5 and 6 and this Part is matched so far as appropriate. There are also rules for the interaction of the two regimes if a loan relationship includes a derivative contract (see section 700).
1493.Secondary legislation modifies the effect of these sections. See in particular the Exchange Gains and Losses (Bringing into Account Gains or Losses) Regulations 2002 (SI 2002/1970), as amended, the Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) Regulations 2004 (SI 2004/3256), as amended, and the Loan Relationships and Derivative Contracts (Change of Accounting Practice) Regulations 2004 (SI 2004/3271), as amended. The modifications in secondary legislation have not been rewritten in these sections.
1494.The Part uses a number of defined terms. The more important are those in sections 576 to 583 (meaning of “derivative contract” and other basic definitions) in Chapter 2, section 596 (meaning of “related transaction”) in Chapter 3 and sections 702 to 710 (other general definitions) in Chapter 13.
1495.Part 10 of Schedule 2 contains a number of transitional rules affecting the application of this Part. The commentary draws attention where relevant to particular paragraphs. But see particularly the paragraphs headed “contracts which became derivative contracts on 16 March 2005”, “contracts which became derivative contracts on 28 July 2005” and “plain vanilla contracts which became derivative contracts before 30 December 2006” which have more general effect.