Taxation of derivatives—anti-avoidance

The following Tax practice note provides comprehensive and up to date legal information covering:

  • Taxation of derivatives—anti-avoidance
  • Unallowable purpose rule
  • When does a derivative contract have an unallowable purpose?
  • Extended meaning of ‘related transaction’
  • Meaning of ‘tax avoidance purpose’
  • ‘Tax advantage’
  • Determining a company’s purpose
  • ‘Main’ purpose
  • Just and reasonable apportionment
  • Allowance of accumulated net losses
  • More...

Taxation of derivatives—anti-avoidance

The general rule is that profits and losses arising to a company from its derivative contracts are brought into account for corporation tax purposes on the basis of the company’s accounting measure of profit and loss in respect of those derivatives, as disclosed in the company's relevant accounts prepared in accordance with generally accepted accounting practice (GAAP). In other words, a company’s accounts prepared in compliance with GAAP provide the means by which the existence, measure and the timing of taxable amounts in relation to its derivative contracts are identified for corporation tax purposes. This is often described as ‘tax following the accounts’. The rules for the taxation of derivative contracts are contained in Part 7 of the Corporation Tax Act 2009 (CTA 2009) and are discussed further in Practice Note: Taxation of derivatives—the main rules.

There are, however, a number of specific circumstances where the rules for the taxation of derivatives depart from their reliance on a company's accounts. One area where this is the case is where anti-avoidance provisions within Part 7 are triggered.

There are focused anti-avoidance rules at several places throughout Part 7, such as anti-avoidance provisions within the group continuity rules, provisions concerning transactions with non-UK residents and provisions which apply where amounts are not fully recognised for accounting purposes.

This Practice Note, however, looks at some of

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