Corporation Tax

Derivative contracts

Produced by Tolley
  • 05 Nov 2021 06:52

The following Corporation Tax guidance note Produced by Tolley provides comprehensive and up to date tax information covering:

  • Derivative contracts
  • What is a derivative?
  • Relevant contract
  • The accounting conditions
  • Excluded underlying subject matter
  • Basis of taxation
  • General rules
  • Anti-avoidance
  • Corporate interest restriction rules
  • Capitalised expenditure
  • More...

Derivative contracts

A derivative contract is a financial instrument, or security, whose price is dependent on, or derived from, one or more underlying assets or indices. It is simply a contract between two or more parties whose value is determined by fluctuations in the underlying asset or index.

The taxation of derivative contracts tends to make tax practitioners nervous unless they are experienced in the financial markets. However, the tax rules governing the basic derivative contracts used in day-to-day treasury transactions (eg forward currency contracts and interest rate swaps) are relatively straightforward. Many companies will have these types of basic derivative contracts without realising they fall within the derivatives rules, so it is worth discussing specific types of arrangement rather than derivatives generally when initially advising on derivatives.

This guidance note steers readers through the rules and provides an overview of the main provisions and their practical application. It includes comments on the main definitions, the basis of taxation and the core anti-avoidance rules.

The Derivative contracts ― general principles (A) video also sets out a basic introduction to the regime, covering the key definitions, exclusions, importance of the underlying subject matter of the derivative contract, the basis of taxation and links to GAAP.

The rules governing the taxation of derivative contracts generally follow the same principles as the loan relationship regime. It is an accounts based income regime, ie unless there is an express provision to the contrary, the amounts recognised in the statutory accounts of the company are taxed as income rather than capital.

The starting point for tax purposes for a derivative contract is to bring into account the credits or debits recognised in the P&L for the period in question in accordance with generally accepted accounting practice (GAAP). This is discussed in more detail below.

The gains and losses on contracts relating to land and certain tangible moveable property are taxable on a chargeable gains basis. These are discussed separately towards the end of this

Access this article and thousands of others like it
free for 7 days with a trial of TolleyGuidance.

Think Tax.
Think Tolley.

Critical, comprehensive and up-to-date tax information


Popular Articles

Withholding tax on payments of interest

This guidance note explains the main scenarios where UK companies (other than financial institutions, etc) must withhold tax at source on payments of interest and how this is dealt with in practice.Obligation to withhold income tax from certain paymentsWhen UK companies, or partnerships of which a

19 Oct 2021 22:53 | Produced by Tolley Read more Read more

Dividend waivers

In certain circumstances shareholders may wish to pay dividends other than in proportion to their shareholdings. This aim is typically achieved by one or more shareholders not taking a dividend when it is declared. To effect this, the relevant shareholders must waive their right to dividends from

25 Oct 2021 07:02 | Produced by Tolley Read more Read more

Pilot trusts and Will planning

A ‘pilot trust’ is one that holds a nominal amount of property (typically a small sum of cash) and does not become active until further funds are added later. The later addition is sometimes made on the client’s death by a gift in his Will. The use of pilot trusts in conjunction with Wills became a

22 Dec 2021 18:41 | Produced by Tolley Read more Read more