(1) For the purposes of this Chapter a company (“the borrower”) has a debtor repo if each of conditions A to E is met.
(2) Condition A is that under an arrangement the borrower receives from another person (“the lender”) any money or other asset (“the advance”).
(3) Condition B is that, in accordance with generally accepted accounting practice, the accounts of the borrower for the period in which the advance is received record a financial liability in respect of the advance.
(4) Condition C is that under the arrangement the borrower sells any securities at any time to the lender.
(5) Condition D is that the arrangement makes provision conferring a right or imposing an obligation on the borrower to buy those or similar securities at any subsequent time.
(6) Condition E is that, in accordance with generally accepted accounting practice, the subsequent buying of those or similar securities would extinguish the financial liability in respect of the advance recorded in the accounts of the borrower.
(7) For the purposes of conditions A to E references to the borrower include a firm of which the borrower is a member.
(1) For the purposes of this Chapter a company (“the borrower”) has a debtor quasi-repo in any case if—
(a) the borrower does not have a debtor repo, and
(b) each of conditions A to E is met.
(2) Condition A is that under an arrangement the borrower receives any money or other asset (“the advance”).
(3) Condition B is that, in accordance with generally accepted accounting practice, the accounts of the borrower for the period in which the advance is received record a financial liability in respect of the advance.
(4) Condition C is that under that or any other arrangement the borrower or any other person sells any securities at any time.
(5) Condition D is that the arrangement or other arrangement—
(a) makes provision conferring a right or imposing an obligation on the borrower to buy the securities or any other securities at any subsequent time, or
(b) makes provision conferring such a right or imposing such an obligation on any other person and makes other relevant provision.
(6) For this purpose any arrangement makes other relevant provision if it makes provision—
(a) for the receipt of any money or other asset from the borrower under that arrangement for the purpose of enabling the other person to make that subsequent purchase, or
(b) for the discharge of any liability to the borrower under that arrangement for that purpose (whether by way of set off or otherwise).
(7) Condition E is that, in accordance with generally accepted accounting practice—
(a) the subsequent buying of the securities or the other securities by the borrower, or
(b) the receipt of the asset from the borrower, or the discharge of the liability to the borrower, under the arrangement or other arrangement,
would extinguish the financial liability in respect of the advance recorded in the accounts of the borrower.
(8) For the purposes of conditions A to E references to the borrower include a firm of which the borrower is a member.
550 Ignoring effect on borrower of sale of securities
(1) This section applies if a company (“the borrower”)—
(a) has a debtor repo or a debtor quasi-repo, or
(b) has a liability which is discharged under a relevant arrangement.
(2) A relevant arrangement is one—
(a) in relation to which conditions C and D in section 549 are met, and
(b) the main purpose or one of the main purposes of which is the obtaining of a tax advantage.
(3) For the purposes of the charge to corporation tax in respect of income of the borrower arising while the arrangement is in force, the Corporation Tax Acts apply as if—
(a) the borrower held the securities which are initially sold for any period for which the arrangement is in force, and
(b) the borrower did not receive in that period amounts representative of income payable in respect of the securities.
(4) Subsection (3) is subject to subsections (5) to (5C) .
(5) No amount is to be charged to corporation tax as a result of subsection (3)(a) unless—
(a) it is, in accordance with generally accepted accounting practice, recognised in determining the borrower's profit or loss for that or any other period, or
(b) it is taken into account in calculating the amounts which are so recognised.
(5A) For the purposes of the charge to corporation tax, an amount representative of income payable in respect of the securities is not to be ignored as a result of subsection (3)(b) if—
(a) it is, in accordance with generally accepted accounting practice, recognised in determining the borrower's profit or loss for that or any other period, or
(b) it is taken into account in calculating the amounts which are so recognised.
(5B) Nothing in subsection (3) entitles the borrower to double taxation relief in respect of any income payable in respect of overseas securities.
(5C) But nothing in subsection (3) affects the entitlement of the borrower to double taxation relief in respect of any overseas tax deducted from any amount representative of income payable in respect of overseas securities.
(5D) In subsection (5C) “overseas tax” means tax under the law of a territory outside the United Kingdom.
(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(7) For the purposes of this section “double taxation relief” means any relief given under or as a result of Part 2 of TIOPA 2010.
551 Relief for borrower for finance charges in respect of the advance
(1) This section applies if a company (“the borrower”) has a debtor repo or a debtor quasi-repo.
(2) The advance under the debtor repo or debtor quasi-repo is, in the case of the borrower, to be treated for the purposes of Part 5 and this Part as a money debt which—
(a) is owed by the borrower or, if the borrower is a member of a firm which receives the advance, by the firm, and
(b) is owed to the person to whom the securities are initially sold.
(3) The arrangement is, in the case of the borrower, to be treated for the purposes of Part 5 and this Part as a transaction for the lending of money from which that debt is treated as arising for those purposes.
(4) Any amount which, in accordance with generally accepted accounting practice, is recorded as a finance charge in respect of the advance in—
(a) the accounts of the borrower, or
(b) if the borrower is a member of a firm which receives the advance, the accounts of the firm,
is treated for the purposes of Part 5, this Part and Part 15 of ITA 2007 (deduction of income tax at source) as interest payable under that debt.
(5) That interest is treated for those purposes as paid at the earlier of—
(a) the time when the relevant repurchase takes place, and
(b) the time when it becomes apparent that that repurchase will not take place.
(6) For this purpose “the relevant repurchase” means—
(a) if the borrower has a debtor repo, the subsequent buying of the securities or similar securities, and
(b) if the borrower has a debtor quasi-repo—
(i) the subsequent buying of the securities or other securities by the borrower,
(ii) the receipt of the asset from the borrower, or
(iii) the discharge of the liability to the borrower,
as the case may be.
(1) For the purposes of this Chapter it does not matter whether or not provision of any arrangement conferring a right or imposing an obligation on any person to buy any securities is subject to any conditions.
(2) For the purposes of this Chapter an arrangement is in force from the time when the securities are initially sold until the earlier of—
(a) the time when the relevant repurchase takes place, and
(b) the time when it becomes apparent that that repurchase will not take place.
(3) In subsection (2) “the relevant repurchase” has the meaning given by subsections (4) to (7).
(4) In the case of a creditor repo, it means the subsequent sale of the securities or similar securities.
(5) In the case of a creditor quasi-repo, it means—
(a) the subsequent sale of the securities or other securities by the lender,
(b) the receipt of the asset from the lender, or
(c) the discharge of the liability to the lender,
as the case may be.
(6) In the case of a debtor repo, it means the subsequent buying of the securities or similar securities.
(7) In the case of a debtor quasi-repo, it means—
(a) the subsequent buying of the securities or other securities by the borrower,
(b) the receipt of the asset from the borrower, or
(c) the discharge of the liability to the borrower,
as the case may be.
(1) For the purposes of this Chapter, in any case where—
(a) a person (“A”) buys securities (or has a right or obligation to buy securities), but
(b) the securities are (or are to be) held for the benefit of another person (“B”),
B (not A) is treated as buying (or having the right or obligation to buy) the securities.
(2) In any case where—
(a) a person (“C”) sells securities, but
(b) the proceeds of the sale are held for the benefit of another person (“D”),
D (not C) is treated as selling the securities.
(1) The Treasury may by regulations provide for all or any of the provisions of this Chapter to apply with modifications in relation to—
(a) cases where section 555 (non-standard repo cases) applies, or
(b) cases involving redemption arrangements, or
(c) both of those cases.
(2) A case involves redemption arrangements if—
(a) arrangements, corresponding to those made in cases where a company has a repo, are made in relation to securities that are to be redeemed in the period after their sale, and
(b) the arrangements are such that a person (instead of having the right or obligation to buy those securities, or similar or other securities, at any subsequent time) has a right or obligation in respect of the benefits which will result from the redemption.
(3) The regulations may make—
(a) different provision for different cases, and
(b) incidental, supplemental, consequential and transitional provision and savings.
(4) In this section and section 555—
“modifications” include exceptions and omissions, and
“repo” means—
a debtor repo or debtor quasi-repo, or
a creditor repo or creditor quasi-repo (including anything treated, as a result of section 547, as a creditor repo for the purposes of section 546).
555 Cases where section 554 applies: non-standard repos
(1) The cases to which this section applies are where—
(a) a company has a repo,
(b) there has been a sale of the securities under the arrangement or arrangements by reference to which the company has the repo, and
(c) any of conditions A to C is met in relation to the repo.
(2) Condition A is that those securities, or similar or other securities, are not subsequently bought under the arrangement or arrangements.
(3) Condition B is that provision is made by or under an arrangement for different or additional securities to be treated as, or as included with, securities which, for the purposes of the subsequent purchase, are to represent those initially sold.
(4) Condition C is that provision is made by or under an arrangement for securities to be treated as not so included.
(1) In this Chapter “securities” (except in the definition of “overseas securities” in section 559) means—
(a) shares, stock or other securities issued by—
(i) the government of the United Kingdom,
(ii) any public or local authority in the United Kingdom, or
(iii) any UK resident company or other UK resident body, or
(b) overseas securities.
(2) For the purposes of this Chapter securities are similar if they entitle their holders to—
(a) the same rights against the same persons as to capital, interest and dividends, and
(b) the same remedies for the enforcement of those rights.
(3) For the purposes of subsection (2) any difference in—
(a) the total nominal amounts of the respective securities,
(b) the form in which they are held, or
(c) the way in which they can be transferred,
is ignored.
For the purposes of this Chapter references to a person receiving any asset include the person—
(a) obtaining the value of any asset directly or indirectly, or
(b) otherwise deriving any benefit from it directly or indirectly.
(1) In determining for the purposes of this Chapter whether an amount is recorded as a financial asset or liability in respect of the advance, it is assumed that the period of account in which the advance is received or made ended immediately after the receipt or making of the advance.
(2) In its application for the purposes of this Chapter, section 309(1) applies as if the reference to a company were a reference to a person.
In this Chapter—
“advance”—
in the case of a creditor repo, has the same meaning as in section 543,
in the case of a creditor quasi-repo, has the same meaning as in section 544,
in the case of a debtor repo, has the same meaning as in section 548, and
in the case of a debtor quasi-repo, has the same meaning as in section 549,
“arrangement” includes any agreement or understanding (whether or not it is legally enforceable),
“creditor quasi-repo” has the meaning given by section 544,
“creditor repo” has the meaning given by section 543,
“debtor quasi-repo” has the meaning given by section 549,
“debtor repo” has the meaning given by section 548,
“discharge”, in relation to a liability, means the discharge of the liability in whole or in part (and “discharged” is to be read accordingly),
“overseas dividend”, in relation to overseas securities, means any interest, dividend or other annual payment payable in respect of the securities, and
“overseas securities” means shares, stock or other securities issued by—
a government or public or local authority of a territory outside the United Kingdom, or
any other body of persons not resident in the United Kingdom.
(1) This Chapter makes provision about investment life insurance contracts to which relevant companies are party.
(2) See, in particular—
(a) sections 562 to 565 (which make provision about treating the contracts as creditor relationships in relation to those companies for the purposes of Part 5), and
(b) sections 566 to 569 (which make provision for cases where the relevant company was a party to the contract before the beginning of the company's first accounting period beginning on or after 1 April 2008).
(3) In this Chapter “relevant company” means a company which is not a life insurance company.
(4) In subsection (3) “life insurance company” means—
(a) an insurance company (as defined in section 65 of FA 2012) which carries on long-term business (as defined in section 63 of that Act), or
(b) a friendly society which would be such an insurance company if subsection (3)(a) were omitted from section 65 of that Act.
(5) For the meaning of “investment life insurance contract”, see section 561.
561 Meaning of “investment life insurance contract”
(1) In this Chapter “investment life insurance contract” means—
(a) a policy of life insurance which has, or is capable of acquiring, a surrender value,
(b) a contract for a purchased life annuity, or
(c) a capital redemption policy,
other than a relevant excluded contract.
(2) In subsection (1)—
“capital redemption policy” means a contract made in the course of capital redemption business (as defined in section 56(3) of FA 2012),
“purchased life annuity” means an annuity—
granted for consideration in money or money's worth in the ordinary course of a business of granting annuities on human life, and
payable for a term ending at a time ascertainable only by reference to the end of a human life (whether or not the annuity may in some circumstances end before or after the life), and
“relevant excluded contract” means—
an investment life insurance contract under a registered pension scheme,
an investment life insurance contract purchased with sums or assets held for the purposes of a registered pension scheme, or
a policy of life insurance issued in respect of an insurance made before 14 March 1989.
(3) A policy of life insurance issued in respect of an insurance made before 14 March 1989 is treated for the purposes of this Chapter as issued in respect of one made on or after that date if it is varied on or after that date so as—
(a) to increase the benefits secured, or
(b) to extend the term of the insurance.
(4) For the purposes of subsection (3) any exercise of rights conferred by a policy is to be regarded as a variation of it.
(1) If a relevant company is a party to an investment life insurance contract, for the purposes of Part 5 (loan relationships) the contract is, in relation to the company, a creditor relationship of the company.
(2) Subsection (1) is subject to subsection (4).
(3) Subsection (4) applies if—
(a) the amount or value of a lump sum payable under an investment life contract by reason of death or the onset of critical illness, exceeds
(b) the surrender value of the contract immediately before the time when the lump sum becomes payable.
(4) If this subsection applies, that excess is not to be brought into account as a credit under Part 5 representing a profit from a related transaction arising as a result of the lump sum becoming payable.
563 Increased non-trading credits for BLAGAB and EEA taxed contracts
(1) This section applies if—
(a) as a result of section 562 the relevant company is required to bring into account for an accounting period a non-trading credit representing a profit from a related transaction, and
(b) the investment life insurance contract is—
(i) a BLAGAB contract, or
(ii) a contract which is subject to a relevant comparable EEA tax charge.
(2) For the meaning of “BLAGAB contract” and of a contract being subject to a relevant comparable EEA tax charge, see section 564.
(3) The non-trading credit is treated as increased by the relevant amount.
(4) The relevant amount is set off against corporation tax assessable on the company for the accounting period.
(5) Except where section 565 (relevant amount where the relevant company uses fair value accounting) applies, the relevant amount is—
NTC
×
AR
100
-
AR
where—
NTC is the non-trading credit, and
AR is the appropriate rate for the accounting period.
(6) The appropriate rate for an accounting period is—
(a) if a single rate of tax under section 102(3) of FA 2012 (lower corporation tax rate on certain insurance company profits) is applicable in relation to the accounting period, that rate, and
(b) if more than one such rate of tax is applicable in relation to the accounting period, the average of those rates over the accounting period.
(1) In section 563 “BLAGAB contract” means a contract forming part of basic life assurance and general annuity business of an insurance company but not part of business which is exempt from corporation tax under section 158 of FA 2012 (friendly society business and former friendly society business).
(2) For the purposes of section 563 a contract is subject to a relevant comparable EEA tax charge if the contract forms part of the business of a company (other than the relevant company) to which a relevant comparable EEA tax charge has applied.
(3) For the purposes of subsection (2) a relevant comparable EEA tax charge has applied to a company if each of conditions A to D is met.
(4) Condition A is that a charge to tax has applied to the company under the laws of a territory outside the United Kingdom that is within the European Economic Area.
(5) Condition B is that the charge has applied to the company—
(a) as a body deriving its status as a company from those laws,
(b) as a company with its place of management there, or
(c) as a company falling under those laws to be regarded for any other reason as resident or domiciled there.
(6) Condition C is that the charge applies at a rate of at least 20% in relation to the amounts subject to tax in the company's hands, other than amounts arising or accruing in respect of investments of a description for which a special relief or exemption is generally available.
(7) Condition D is that the charge is made otherwise than by reference to the company's profits.
565 Relevant amount where the relevant company uses fair value accounting
(1) This section applies if the relevant company brings credits and debits in respect of the investment life insurance contract into account on the basis of fair value accounting.
(2) If this section applies, the relevant amount for section 563 is—
PC
×
AR
100
-
AR
where—
PC is the profit from the contract (see subsections (3) and (4)), and
AR is the appropriate rate for the accounting period (as defined in section 563(6)).
(3) For the purposes of this section, except where subsection (4) applies, the profit from the contract is any amount by which—
(a) the amount payable as a result of the related transaction, exceeds
(b) the fair value of the contract at the beginning time (see subsection (6)).
(4) If the related transaction is an assignment or surrender of only part of the rights conferred by the contract, the profit from the contract is any amount by which—
(a) the amount payable as a result of the related transaction, exceeds
(b) the relevant fraction of the fair value of the contract at the beginning time.
(5) In subsection (4) “the relevant fraction” means—
C
FVC
where—
C is the amount payable as a result of the related transaction, and
FVC is the fair value of the contract immediately before the related transaction.
(6) In this section “the beginning time” means—
(a) if the contract was made before the beginning of the first accounting period of the company beginning on or after 1st April 2008, at the beginning of that period, and
(b) otherwise when the contract was made.
(1) This section and sections 567 to 569 apply if the relevant company was a party to an investment life insurance contract immediately before the beginning of the first accounting period of the company beginning on or after 1 April 2008.
(2) In those sections—
“the deemed surrender” means the surrender of all the rights under that contract that the relevant company was deemed for the purposes of Chapter 2 of Part 13 of ICTA (life policies etc) to have made ... under paragraph 6(1) of Schedule 13 to FA 2008 ...,
“the first accounting period” means the first accounting period of the company beginning on or after 1 April 2008, and
“the old contract” means the contract mentioned in subsection (1).
567 Gains on deemed surrenders to be brought into account on related transactions
(1) Any gain which arose under Chapter 2 of Part 13 of ICTA (life policies etc) as a result of the deemed surrender (“the deemed gain”) is to be brought into account by the relevant company as a non-trading credit for the accounting period in which there is a related transaction (so far as not previously brought into account under this section).
(2) But if the relevant company is still a party to the old contract immediately after the related transaction, only the relevant fraction of the deemed gain which would otherwise be brought into account under subsection (1) is to be so brought into account.
(3) “The relevant fraction” is—
P
SAR
where—
P is the amount payable as a result of the related transaction, and
SAR is the amount which would have been payable on a surrender of all the rights under the old contract immediately before the related transaction.
568 Restriction on credits on old contracts: fair value accounting cases
(1) This section applies if—
(a) at all times since the old contract was made the rights conferred by it have been in the beneficial ownership of the relevant company,
(b) the company brings into account credits and debits in respect of the old contract on the basis of fair value accounting, and
(c) the old contract cost exceeds the fair value of the contract immediately before the beginning of the first accounting period.
(2) In subsection (1)(c) “the old contract cost” means—
(a) if section 541 of ICTA applied on the deemed surrender, the amount specified in section 541(1)(b)(i) of that Act, less the amount or value of any relevant capital payments (as defined in section 541(5)(a) of that Act), and
(b) if section 543 of that Act applied on the deemed surrender, the amount specified in section 543(1)(a)(i) of that Act, less the amount or value of any relevant capital payments (as defined in section 543(3) of that Act).
(3) No amount is to be brought into account as a credit in relation to the old contract by the relevant company as a result of section 562 except so far as the total of—
(a) the amount of the credit, and
(b) the amount of any other credits which have previously arisen in relation to the old contract as a result of that section,
is greater than the excess mentioned in subsection (1)(c).
569 Restriction on debits on old contracts: non-fair value accounting cases
(1) This section applies where—
(a) the relevant company brings into account credits and debits in respect of the old contract otherwise than on the basis of fair value accounting, and
(b) the carrying value of the old contract, as recognised for accounting purposes immediately before the beginning of the first accounting period, exceeds its fair value at that time.
(2) No amount is to be brought into account as a debit in relation to the old contract by the relevant company as a result of section 562 except so far as the total of—
(a) the amount of the debit, and
(b) the amount of any other debits which have previously arisen in relation to the contract as a result of that section,
is greater than the excess mentioned in subsection (1)(b).
(1) This Part is about how profits and losses arising to a company from its derivative contracts are brought into account for corporation tax purposes.
(2) For the meaning of “derivative contract”, see section 576 and the remainder of Chapter 2.
(3) For how such profits and losses are calculated and brought into account, see—
(a) section 572 (profits and losses to be calculated using credits and debits given by this Part),
(b) section 573 (trading credits and debits to be brought into account under Part 3),
(c) section 574 (non-trading credits and debits to be brought into account under Part 5), and
(d) Chapter 7 (chargeable gains arising in relation to derivative contracts).
(4) For the priority of this Part for corporation tax purposes, see Chapter 12.
(5) This Part also contains the following Chapters (which mainly relate to the amounts to be brought into account in respect of derivative contracts)—
(a) Chapter 3 (credits and debits to be brought into account: general),
(b) Chapter 4 (further provision about credits and debits to be brought into account),
(c) Chapter 5 (continuity of treatment on transfers within groups),
(d) Chapter 6 (special kinds of company),
(e) Chapter 8 (further provision about chargeable gains and derivative contracts),
(f) Chapter 9 (European cross-border transfers of business),
(g) Chapter 10 (European cross-border mergers),
(h) Chapter 11 (tax avoidance), and
(i) Chapter 13 (general and supplementary provisions).
(6) See also section 980 of ITA 2007 (payments under derivative contracts excepted from duty to deduct income tax).
(1) The general rule for corporation tax purposes is that all profits arising to a company from its derivative contracts are chargeable to corporation tax as income in accordance with this Part.
(2) But see Chapter 7, which makes provision for cases in which profits arising to a company from its derivative contracts are chargeable to corporation tax as chargeable gains.
572 Profits and losses to be calculated using credits and debits given by this Part
(1) Profits and losses arising to a company from its derivative contracts are to be calculated using the credits and debits given by this Part.
(2) For exceptions to this section, see sections 652 to 658 (issuers of securities with embedded derivatives: deemed options and contracts for differences).
573 Trading credits and debits to be brought into account under Part 3
(1) This section applies so far as in an accounting period a company is a party to a derivative contract for the purposes of a trade it carries on.
(2) The credits in respect of the contract for the period are treated as receipts of the trade which are to be brought into account in calculating the profits of the trade for that period.
(3) The debits in respect of the contract for the period are treated as expenses of the trade which are deductible in calculating those profits.
(4) So far as subsection (3) provides for any amount to be deductible, it applies despite anything in—
(a) section 53 (capital expenditure),
(b) section 54 (expenses not wholly and exclusively for trade and unconnected losses), or
(c) section 59 (patent royalties).
(5) For cases in which this section does not apply, see—
(a) section 616 (disapplication of fair value accounting for certain embedded derivatives), and
(b) Chapter 7 (chargeable gains arising in relation to derivative contracts).
574 Non-trading credits and debits to be brought into account under Part 5
(1) This section applies if, for an accounting period, there are credits or debits in respect of the derivative contracts of a company which are not brought into account in accordance with section 573.
(2) Those credits or debits—
(a) are to be treated as non-trading credits or non-trading debits (within the meaning of Part 5 (loan relationships)) for the period, and
(b) are accordingly to be brought into account in determining whether the company has non-trading profits or a non-trading deficit from its loan relationships for the period.
(2A) In the case of a non-UK resident company, subsection (2) needs to be read with section 5(3), (3A)(b) and (3B)(b) (territorial scope of charge to corporation tax).
(3) For cases in which this section does not apply, see—
(a) section 616 (disapplication of fair value accounting for certain embedded derivatives), and
(b) Chapter 7 (chargeable gains arising in relation to derivative contracts).
(1) This Chapter makes provision about the contracts to which this Part applies.
(2) In particular, it—
(a) contains a definition of “derivative contract” (see section 576),
(b) contains other definitions (such as “relevant contract”, “option”, “future” and “contract for differences”) which are used in determining whether a contract is a derivative contract (see sections 577 to 583),
(c) makes provision about cases in which companies are treated as parties to relevant contracts (see sections 584 to 586),
(d) provides for certain contracts and transactions to be treated as derivative contracts (see sections 587 and 588), and
(e) provides for certain contracts to be treated as not being derivative contracts because of their underlying subject matter (see sections 589 to 593).
(1) For the purposes of this Part, a contract of a company is a derivative contract of the company for an accounting period if it—
(a) is a relevant contract (see sections 577 and 578),
(b) meets any of the accounting conditions for the accounting period (see section 579), and
(c) is not prevented from being a derivative contract by section 589 (contracts excluded because of underlying subject matter: general) or any other provision of the Corporation Tax Acts.
(2) See also sections 587 and 588 (other contracts etc treated as derivative contracts).
(3) But note section 701 which includes power to amend the provisions of this Chapter relating to the meaning of “derivative contract”.
(1) In this Part “relevant contract” means—
(a) an option,
(b) a future, or
(c) a contract for differences.
(2) For the meaning of “option”, “future” and “contract for differences”, see sections 580, 581 and 582 respectively.
578 Relevant contracts of a company and being party to such contracts
(1) For the purposes of this Part, references to a relevant contract of a company are references to a relevant contract entered into or acquired by the company (but see subsection (3)).
(2) For the purposes of this Part, a relevant contract is acquired by a company if the company becomes—
(a) entitled to the rights under the relevant contract, and
(b) subject to the liabilities under it.
(3) For particular cases where companies are treated as parties to relevant contracts, see—
(a) section 584 (hybrid derivatives with embedded derivatives),
(b) section 585 (loan relationships with embedded derivatives), and
(c) section 586 (other contracts with embedded derivatives).
(4) References in this Part to a company being a party to a relevant contract are to be read in accordance with this section.
(1) The accounting conditions for any accounting period are that—
(a) the relevant contract is treated for accounting purposes as a derivative,
(b) the relevant contract—
(i) is not so treated just because of not meeting the requirement in paragraph 9(b) of Financial Reporting Standard 26 issued in December 2004 by the Accounting Standards Board (requirement for no initial net investment or smaller initial net investment than comparable types of contract), but
(ii) is or forms part of a financial asset or liability for accounting purposes, or
(c) the relevant contract is not within paragraph (a) or (b), but is within subsection (2).
(2) A relevant contract is within this subsection if—
(a) its underlying subject matter is commodities, or
(b) it is a contract for differences whose underlying subject matter is—
(i) land,
(ii) tangible movable property, other than commodities which are tangible assets,
(iii) intangible fixed assets,
(iv) weather conditions, or
(v) creditworthiness.
(3) For the purposes of subsection (1)(a), a relevant contract of a company is treated for accounting purposes as a derivative for an accounting period if for that period—
(a) it is so treated for the purposes of the relevant accounting standard used by the company for that period, or
(b) it would be so treated if the company used the relevant accounting standard for that period in respect of the contract.
(4) For the purposes of subsection (1)(b), a relevant contract of a company is or forms part of a financial asset or liability for accounting purposes for an accounting period if for that period—
(a) it is or does so for the purposes of the relevant accounting standard used by the company for that period, or
(b) it would be or would do so if the company used the relevant accounting standard for that period in respect of the contract.
(5) In this section “relevant accounting standard” means—
(a) for any accounting period in relation to which it is required or permitted to be used, Financial Reporting Standard 25 issued in December 2004 by the Accounting Standards Board, as from time to time modified, amended or revised, or
(b) for any accounting period in relation to which it is required or permitted to be used, any subsequent accounting standard dealing with transactions which are derivatives, as from time to time modified, amended or revised.
(6) For the meaning of “underlying subject matter”, see section 583.
(1) In this Part “option” includes a warrant.
(2) References in this Part to an option do not include a contract whose terms—
(a) provide—
(i) 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
(ii) 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
(b) do not provide for the delivery of any property.
(3) Subsection (2) does not prevent an option whose underlying subject matter is currency from being an option.
(4) But see—
(a) section 652 (introduction to sections 653 to 655),
(b) section 665 (issuers of securities with embedded derivatives: equity instruments), and
(c) section 695 (transfers of value to connected companies),
in which “option” is to be construed as if subsections (2) and (3) were omitted.
(1) In this Part “future” means 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,
but this is subject to subsection (3).
(2) For the purposes of subsection (1)(b), a price is agreed when the contract is made even if—
(a) the price 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, provision is made for a variation in the price to take account of any variation in quantity or quality on delivery.
(3) References in this Part to a future do not include a contract whose terms—
(a) provide—
(i) 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
(ii) 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
(b) do not provide for the delivery of any property.
(4) Subsection (3) does not prevent a future whose underlying subject matter is currency from being a future.
(1) In this Part “contract for differences” means 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.
and includes a contract which falls within section 6(2) of, or paragraph 1(1) of Schedule 2 to, the Energy Act 2013.
(2) But none of the following is a contract for differences—
(a) an option,
(b) a future,
(c) a contract of insurance,
(d) a capital redemption policy,
(e) a contract of indemnity,
(f) a guarantee,
(g) a warranty, or
(h) a loan relationship.
(3) For the purposes of subsection (1)(b), an index or factor may be determined by reference to any matter.
(1) In this Part references to the underlying subject matter of a relevant contract are to be read as follows.
(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) if the property which would so fall is a derivative contract, the underlying subject matter of that 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) if the property which would so fall is a derivative contract, the underlying subject matter of that contract.
(4) The underlying subject matter of a contract for differences is—
(a) if the contract for differences relates to fluctuations in the value or price of property described in the contract, the property so described, or
(b) if an index or factor is designated in the contract for differences, the matter by reference to which the index or factor is determined.
(5) The things which may be the subject matter of a contract for differences include—
(a) interest rates,
(b) weather conditions, and
(c) creditworthiness.
(6) Interest rates are not the underlying subject matter of a relevant contract if—
(a) under the terms of that contract—
(i) the date on which a party to that contract becomes subject to a duty to make a payment is a variable date, and
(ii) the amount of that payment varies according to the date of payment, and
(b) those terms refer to an interest rate only for the purpose of establishing that amount.
(7) The underlying subject matter of a relevant contract is not treated as being—
(a) land,
(b) shares in a company, or
(c) rights of a unit holder under a unit trust scheme,
just because its underlying subject matter includes income from that kind of property.
(1) This section applies if—
(a) a company is a party to a relevant contract which meets the condition in section 579(1)(b) or (c) (contracts not treated for accounting purposes as derivatives),
(b) in accordance with generally accepted accounting practice, the company treats the rights and liabilities under the contract as divided between—
(i) rights and liabilities under one or more derivatives (“embedded derivatives”), and
(ii) the remaining rights and liabilities, and
(c) a contract consisting of only those remaining rights and liabilities would be a relevant contract.
(2) The company is treated for the purposes of this Part—
(a) as a party to a relevant contract whose rights and liabilities consist only of those of the embedded derivative, or (if there is more than one embedded derivative) as a party to relevant contracts each of whose rights and liabilities consist only of those of one of the embedded derivatives, and
(b) as a party to a relevant contract whose rights and liabilities are those within subsection (1)(b)(ii).
(3) Each relevant contract to which a company is treated as a party under subsection (2) is treated for the purposes of this Part as an option, a future or a contract for differences depending on what the character of a separate contract containing the rights and liabilities of the deemed relevant contract would be.
(4) In this Part “hybrid derivative” means a relevant contract within subsection (1)(a).
(5) See also—
(a) section 592 (embedded derivatives treated as meeting condition in section 591 etc), and
(b) section 616 (disapplication of fair value accounting for certain embedded derivatives).
(1) This section applies if in accordance with generally accepted accounting practice a company treats the rights and liabilities under a loan relationship to which it is a party as divided between—
(a) rights and liabilities under a loan relationship, and
(b) rights and liabilities under one or more derivative financial instruments or equity instruments (“embedded derivatives”).
(2) The company is treated for the purposes of this Part—
(a) 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, as a party to relevant contracts each of whose rights and liabilities consist only of those of one of the embedded derivatives.
(3) Each relevant contract to which a company is treated as a party under subsection (2) is treated for the purposes of this Part as an option, a future or a contract for differences depending on what the character of a separate contract containing the rights and liabilities of the embedded derivative would be.
(4) For the corresponding treatment of the rights and liabilities within subsection (1)(a), see section 415 (loan relationships with embedded derivatives).
(5) See also—
(a) section 416 (election for section 415 and this section to apply), and
(b) section 635 (some creditor relationships treated as ones in relation to which section 415 and this section have effect).
(1) This section applies if a company—
(a) is a party to a contract which is neither a hybrid derivative nor a loan relationship, and
(b) in accordance with generally accepted accounting practice, treats the rights and liabilities under the contract as divided between—
(i) rights and liabilities under one or more derivatives (“embedded derivatives”), and
(ii) the remaining rights and liabilities.
(2) The company is treated for the purposes of this Part—
(a) 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, as a party to relevant contracts each of whose rights and liabilities consist only of those of one of the embedded derivatives.
(3) Each relevant contract to which a company is treated as a party under subsection (2) is treated for the purposes of this Part as an option, a future or a contract for differences depending on what the character of a separate contract containing the rights and liabilities of the embedded derivative would be.
(4) See also section 616 (disapplication of fair value accounting for certain embedded derivatives).
587 Contract relating to holding in OEIC, unit trust or offshore fund
(1) This section applies in relation to a relevant contract to which a company is a party in an accounting period if—
(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).