The following Banking & Finance guidance note provides comprehensive and up to date legal information covering:
The derivative contracts regime represents a comprehensive, self-contained and exclusive regime for the taxation of a company's derivative transactions in the UK. It only applies to entities subject to UK corporation tax.
A company may trade in derivative instruments but they are more usually held as either investments or as instruments intended to mitigate (ie hedge) a risk or potential liability exposure of the company (eg changes in cash flow or the fair value of assets). They can, therefore, be used to smooth volatility (eg in interest rates or currency) and/or to give certainty for the company, especially in relation to future liabilities.
A derivative will generally achieve this by referencing the rights and obligations of the parties under the contract to the fluctuations in the price or value of some underlying property, index or other factor. In an interest rate swap, for example, one party will pay a fixed interest rate under the derivative in order to receive floating rate payments from the other party.
In any given scenario, the transactions are likely to produce income, profits and gains for the company as the fair value of the derivative moves 'in' or 'out' of the money (ie the company is either making a profit or a loss).
The derivative contracts regime sets out the rules for how such income, profits and
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