Finance Act 2002 (c. 23)

(The document as of February, 2008)

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(2) The provision that may be made by an order under this paragraph includes provision--

(a) adding to, or varying, the descriptions of contract which are derivative contracts within paragraph 2 or removing any such description of contract, or

(b) adding to, or varying, the descriptions of contracts which are excluded under paragraph 4 or removing any such description of contract.

(3) The provision that may be made under sub-paragraph (2)(b), in relation to contracts which are excluded under paragraph 4, includes provision adding to, or varying, the provisions which qualify the exclusion of contracts under that paragraph or removing any such qualifying provision.

(4) To the extent that an order under this paragraph includes provision--

(a) varying the requirements under paragraph (a) or (b)of sub-paragraph (1) of paragraph 3 as to the treatment of a contract for accounting purposes, or

(b) adding to, or varying, the descriptions of contracts which fall within sub-paragraph (2) of that paragraph,

it may provide for such variations to have effect in relation to accounting periods which end on or after the day on which the order comes into force (whenever beginning).

(5) The power to make an order under this paragraph includes power--

(a) to make different provision for different cases, and

(b) to make such consequential, supplementary, incidental or transitional provisions, or savings, as appear to the Treasury to be necessary or expedient (including provision amending any enactment or any instrument made under an enactment).

Part 3 Method of taxation

Method of bringing amounts into account

14 (1) For the purposes of corporation tax the profits and losses arising from the derivative contracts of a company shall be computed in accordance with this paragraph using the credits and debits given for the accounting period in question by the following provisions of this Schedule.

(2) To the extent that, in any accounting period, a derivative contract of a company is one to which the company is party for the purposes of a trade carried on by it, the credits and debits given in respect of that contract for that period shall be treated (according to whether they are credits or debits) either--

(a) as receipts of that trade falling to be brought into account in computing the profits of that trade for that period; or

(b) as expenses of that trade which are deductible in computing those profits.

(3) Where for any accounting period there are, in respect of the derivative contracts of a company, credits and debits that are not brought into account under sub-paragraph (2), they shall be brought into account for that accounting period as if they were non-trading credits or non-trading debits falling to be brought into account for the purposes of Chapter 2 of Part 4 of the Finance Act 1996 (c. 8) in respect of loan relationships of the company.

(4) Sub-paragraph (2), so far as it provides for any amount to be deductible as mentioned in paragraph (b) of that sub-paragraph, shall have effect notwithstanding anything in section 74 of the Taxes Act 1988 (allowable deductions).

Credits and debits brought into account

15 (1) The credits and debits to be brought into account in the case of any company in respect of its derivative contracts shall be the sums which, in accordance with an authorised accounting method and when taken together, fairly represent, for the accounting period in question--

(a) all profits and losses of the company which (disregarding any charges or expenses) arise to the company from its derivative contracts and related transactions; and

(b) all charges and expenses incurred by the company under or for the purposes of its derivative contracts and related transactions.

(2) The reference in sub-paragraph (1)(a) to the profits and losses arising to a company does not include a reference to any amounts required to be transferred to the company's share premium account.

(3) The reference in sub-paragraph (1)(a) to the profits and losses arising to a company includes--

(a) a reference to any profits or losses which, in accordance with generally accepted accounting practice, are carried to or sustained by any reserve maintained by the company, and

(b) a reference to any forward premiums or discounts which arise from a derivative contract whose underlying subject matter consists wholly or partly of currency and which, in accordance with generally accepted accounting practice, are brought into account as profits or losses.

(4) The reference in sub-paragraph (1)(b) to charges and expenses incurred for the purposes of a company's derivative contracts and related transactions does not include a reference to any charges or expenses other than those incurred directly--

(a) in bringing any of those contracts into existence;

(b) in entering into or giving effect to any of those transactions;

(d) in taking steps for ensuring the receipt of payments under any of those contracts or in accordance with any of those transactions.

(5) Where--

(a) any charges or expenses are incurred by a company for purposes connected--

(i) with entering into a derivative contract or related transaction, or

(ii) with giving effect to any obligation that might arise under a derivative contract or related transaction,

(b) at the time when the charges or expenses are incurred, the contract or transaction is one into which the company may enter but has not entered, and

(c) if that contract or transaction had been entered into by that company, the charges or expenses would be charges or expenses incurred as mentioned in sub-paragraph (4),

those charges or expenses shall be treated for the purposes of this Schedule as charges or expenses in relation to which debits may be brought into account in accordance with sub-paragraph (1)(b) to the same extent as if the contract or transaction had been entered into.

(6) Where--

(a) different authorised accounting methods are used for the purposes of this Schedule as respects the same derivative contract for different parts of the same accounting period or for successive accounting periods, and

(b) an amount is brought into account for the purposes of the company's statutory accounts in respect of the change of method,

that amount shall be taken for the purposes of this Schedule to be included among the sums in respect of which credits and debits fall to be brought into account for the purposes of this Schedule in accordance with sub-paragraph (1)(a).

(7) In this Schedule "related transaction", in relation to a derivative contract, means any disposal or acquisition (in whole or in part) of rights or liabilities under the derivative contract.

(8) The cases where there shall be taken for the purposes of sub-paragraph (7) to be a disposal or acquisition of rights or liabilities under a derivative contract shall include--

(a) those where such rights or liabilities are transferred or extinguished by any sale, gift, surrender or release, and

(b) those where the contract is discharged by performance in accordance with its terms.

(9) This paragraph has effect subject to paragraph 16.

Exchange gains and losses arising from derivative contracts

16 (1) The reference in paragraph 15(1)(a) to the profits and losses arising to a company from its derivative contracts and related transactions includes a reference to exchange gains and losses arising to the company from its derivative contracts.

(2) Sub-paragraph (1) is subject to the following provisions of this paragraph.

(3) Sub-paragraph (1) does not have effect in relation to--

(a) so much of an exchange gain or loss arising to a company, in relation to a derivative contract whose underlying subject matter consists wholly or partly of currency, as falls within sub-paragraph (4),

(b) so much of any exchange gain or loss arising to a company as results from any translation from one currency to another pursuant to section 93A(4) of the Finance Act 1993 (c. 34) of the profit or loss of part of the company's business and falls within sub-paragraph (6), or

(c) so much of an exchange gain or loss arising to a company, in relation to a derivative contract whose underlying subject matter consists wholly or partly of currency, as falls within a description prescribed for the purpose in regulations made by the Treasury.

(4) For the purposes of sub-paragraph (3)(a), an exchange gain or loss falls within this sub-paragraph to the extent that in accordance with generally accepted accounting practice an amount representing the whole or part of it--

(a) is carried to or sustained by a reserve maintained by the company; and

(b) is set off by or against an amount falling within sub-paragraph (5).

(5) An amount falls within this sub-paragraph if--

(a) it represents the whole or part of an exchange gain or loss arising to the company in relation to any asset of the company; and

(b) in accordance with generally accepted accounting practice it is carried to or sustained by the reserve mentioned in sub-paragraph (4).

(6) For the purposes of sub-paragraph (3)(b), an exchange gain or loss falls within this sub-paragraph to the extent that, in accordance with generally accepted accounting practice, an amount representing the whole or part of it is carried to or sustained by a reserve maintained by the company.

(7) Where, by virtue of sub-paragraph (3), sub-paragraph (1) does not have effect in relation to an amount representing the whole or part of an exchange gain or loss, paragraph 15(3) shall not have effect in relation to that amount (but this sub-paragraph is subject to regulations under sub-paragraph (8)).

(8) The Treasury may by regulations make provision for or in connection with bringing into account in prescribed circumstances amounts in relation to which sub-paragraph (1) does not, by virtue of sub-paragraph (3), have effect.

(9) The reference in sub-paragraph (8) to bringing amounts into account is a reference to bringing amounts into account--

(a) for the purposes of this Schedule, as credits or debits arising to a company from its derivative contracts and related transactions; or

(b) for the purposes of the Taxation of Chargeable Gains Act 1992 (c. 12).

(10) Any power to make regulations under this paragraph includes power to make different provision for different cases.

Part 4 Accounting methods

Authorised accounting methods

17 (1) Subject to the following provisions of this Schedule, the alternative accounting methods that are authorised for the purposes of this Schedule are--

(a) an accruals basis of accounting; and

(b) a mark to market basis of accounting under which any derivative contract to which that basis is applied is brought into account in each accounting period at a fair value.

(2) An accounting method applied in any case shall be treated as authorised for the purposes of this Schedule only if--

(a) subject to paragraphs (b) to (d), it is in conformity with generally accepted accounting practice to use that method in that case;

(b) it contains proper provision for allocating payments under a derivative contract, or arising as a result of a related transaction, to accounting periods;

(c) it contains proper provision for determining exchange gains and losses from a derivative contract for accounting periods; and

(d) where it is an accruals basis of accounting, it does not contain any provision (other than provision in respect of exchange losses or provision comprised in authorised arrangements for bad debt) that gives debits by reference to the valuation at different times of any derivative contract.

(3) In the case of an accruals basis of accounting, proper provision for allocating payments under a derivative contract to accounting periods is provision which--

(a) allocates payments to the period to which they relate, without regard to the periods in which they are made or received or in which they become due and payable;

(b) includes provision which, where payments relate to two or more periods, apportions them on a just and reasonable basis between the different periods;

(c) assumes, subject to authorised arrangements for bad debt, that every amount payable to the company under the derivative contract will be paid in full as it becomes due;

(d) secures the making of the adjustments required in the case of the derivative contract by authorised arrangements for bad debt; and

(e) provides, subject to authorised arrangements for bad debt, that, where there is a release of any liability owed by the company under the derivative contract, the appropriate amount in respect of the release is credited to the company in the accounting period in which the release takes place.

(4) In the case of a mark to market basis of accounting, proper provision for allocating payments under a derivative contract to accounting periods is provision which allocates payments to the periods in which they become due and payable.

(5) In this paragraph the references to authorised arrangements for bad debt are references to accounting arrangements under which debits and credits are brought into account in conformity with the provisions of paragraph 22.

(6) In this paragraph "fair value", in relation to a derivative contract of a company, means the amount which, at the time as at which the value falls to be determined, is the amount that the company would obtain from or, as the case may be, would have to pay to an independent person for--

(a) the transfer of all the company's rights under the contract in respect of amounts which at that time are not yet due and payable; and

(b) the release of all the company's liabilities under the contract in respect of amounts which at that time are not yet due and payable.

Application of accounting methods

18 (1) This paragraph has effect, subject to the following provisions of this Schedule, for the determination of which of the alternative authorised accounting methods that are available by virtue of paragraph 17 is to be used as respects the derivative contracts of a company.

(2) Different methods may be used as respects different derivative contracts or, as respects the same derivative contract, for different accounting periods or different parts of the same accounting period.

(3) If a basis of accounting which is or equates with an authorised accounting method is used as respects any derivative contract of a company in a company's statutory accounts, then the method which is to be used for the purposes of this Schedule as respects that contract for the accounting period, or part of a period, for which that basis is used in those accounts shall be--

(a) where the basis used in those accounts is an authorised accounting method, that method; and

(b) where it is not, the authorised accounting method to which it equates;

but this sub-paragraph is subject to paragraphs 19 to 21.

(4) For any period or part of a period for which the authorised accounting method to be used as respects a derivative contract of a company is not--

(a) the method determined under sub-paragraph (3),

(b) an authorised mark to market basis of accounting in accordance with an election under paragraph 19, or

an authorised accruals basis of accounting shall be used for the purposes of this Schedule as respects that derivative contract.

(5) For the purposes of this paragraph (but subject to sub-paragraph (6))--

(a) a basis of accounting equates with an authorised accruals basis of accounting if it purports to allocate payments under a derivative contract to accounting periods according to when they are taken to accrue; and

(b) a basis of accounting equates with an authorised mark to market basis of accounting if it purports in respect of a derivative contract--

(i) to produce credits or debits computed by reference to the determination, as at different times in an accounting period, of a fair value; and

(ii) to produce credits or debits relating to payments under that derivative contract according to when they become due and payable.

(6) An accounting method which purports to make any such allocation of payments under a derivative contract as is mentioned in sub-paragraph (5)(a) shall be taken for the purposes of this paragraph to equate with an authorised mark to market basis of accounting (rather than with an authorised accruals basis of accounting) if--

(a) it purports to bring that derivative contract into account in each accounting period at a value which would be fair value if the valuation were made on the basis that any periodic payments falling to be made under the contract were to be disregarded to the extent that they have already accrued; and

(b) the credits and debits produced in the case of that contract by that method (when it is properly applied) correspond, for all practical purposes, to the credits and debits produced in the case of that contract, and for the same accounting period, by an authorised mark to market basis of accounting.

Application of accounting methods: election to follow generally accepted accounting practice

19 (1) Sub-paragraph (2) has effect if, in the case of a company falling within paragraph 52(1)(c) or (d)(companies whose statutory accounts are accounts to which Part 1 of Schedule 21C or 21D to the Companies Act 1985 (c. 6) applies or accounts falling to be drawn up in accordance with the requirements imposed under the law of the home State),--

(a) an authorised mark to market basis of accounting would be used as respects some or all of the company's derivative contracts, were the company a UK company following generally accepted accounting practice, but

(b) that is not the basis of accounting used as respects those derivative contracts in the company's statutory accounts.

(2) Where this sub-paragraph has effect in relation to a company, the company may elect to use an authorised mark to market basis of accounting as its authorised accounting method for the purposes of this Schedule in relation to every derivative contract as respects which that basis would be used were it a UK company following generally accepted accounting practice.

(3) Any election under sub-paragraph (2)--

(a) must be made before the expiration of the period of two years following the end of the company's first accounting period beginning on or after 1st October 2002 in which it is party to a derivative contract in relation to which an election under sub-paragraph (2) may be made;

(b) has effect for that accounting period and all subsequent accounting periods of the company; and

(4) A company which makes an election under sub-paragraph (2) as respects its derivative contracts shall be taken for the purposes of Chapter 2 of Part 4 of the Finance Act 1996 (c. 8) to have at the same time made an election under section 86(3A) of that Act having effect--

(a) for the accounting periods mentioned in sub-paragraph (3)(b), and

(b) as respects any loan relationships to which the company is or may become a party in any of those accounting periods,

and that election shall so have effect notwithstanding anything in paragraph (a) or (b) of subsection (3B) of that section.

Application of accounting methods: requirement to follow generally accepted accounting practice

20 (1) Sub-paragraph (2) has effect if, in the case of a company falling within paragraph 52(1)(c) or (d),--

(a) the company has not made an election under paragraph 19,

(b) an authorised mark to market basis of accounting would be used for an accounting period--

(i) as respects some or all of the company's derivative contracts, and

(ii) as respects some or all of its loan relationships,

were the company a UK company following generally accepted accounting practice, and

(i) is used in the company's statutory accounts as respects those loan relationships for that accounting period, but

(ii) is not the basis of accounting used in the company's statutory accounts as respects those derivative contracts for that accounting period.

(2) Where this sub-paragraph has effect in relation to any accounting period, the company must for that accounting period use an authorised mark to market basis of accounting as its authorised accounting method for the purposes of this Schedule in relation to every derivative contract as respects which that basis would be used were it a UK company following generally accepted accounting practice.

(3) Sub-paragraph (4) has effect where, in the case of a derivative contract of a company,--

(a) the company uses, as respects the contract, a basis of accounting other than an authorised mark to market basis of accounting for an accounting period (the "preceding period"), but

(b) by virtue of sub-paragraph (2), the company must for the succeeding accounting period (the "first mark to market period") use, as respects the contract, an authorised mark to market basis of accounting as its authorised accounting method for the purposes of this Schedule.

(4) Where this sub-paragraph has effect in relation to a derivative contract of a company, the company shall be deemed--

(a) to have disposed of the contract immediately before the end of the preceding period for a consideration of an amount equal to the fair value of the contract at that time, and

(b) to have reacquired it for the same consideration immediately after the beginning of the first mark to market period.

Basis of accounting for contracts falling within paragraph 6, 7 or 8

21 (1) This paragraph applies in relation to a contract which is a derivative contract for the purposes of this Schedule by virtue of--

(a) paragraph 6 (contracts producing a guaranteed return),

(b) paragraph 7 (contracts where guaranteed amount payable on maturity), or

(2) Where this paragraph applies in relation to a derivative contract, the accounting method to be used as respects the derivative contract for an accounting period shall be an authorised mark to market basis of accounting.

Part 5 Special provision for bad debt etc

Bad debt etc

22 (1) In determining the credits and debits to be brought into account in accordance with an accruals basis of accounting, a departure from the assumption in the case of the derivative contracts of a company that every amount payable under those contracts to the company will be paid in full as it becomes due shall be allowed to the extent only that--

(a) a debt is a bad debt;

(b) a doubtful debt is estimated to be bad; or

(2) Such a departure shall be made only where the accounting arrangements of the company satisfy sub-paragraphs (3) and (4).

(3) This sub-paragraph is satisfied if the accounting arrangements allowing the departure also require appropriate adjustments, in the form of credits, to be made if the whole or any part of an amount taken or estimated to represent an amount of bad debt is paid or otherwise ceases to be an amount in respect of which such a departure is allowed.

(4) This sub-paragraph is satisfied if, in determining any credits and debits to be brought into account in respect of exchange gains and losses arising from the company's derivative contracts, the accounting arrangements allowing the departure require an amount payable under a derivative contract--

(a) to be left out of account, to the extent that such a departure is allowed; and

(b) to be taken into account again, to the extent that it is represented by credits brought into account under sub-paragraph (3).

(5) Where--

(a) in the case of a derivative contract of a company, a liability owed by the company to pay an amount under the contract is released, and

(b) the release takes place in an accounting period for which an authorised accruals basis of accounting is used as respects the contract,

no credit in respect of the release shall be required to be brought into account in the case of the company if the release is part of a relevant arrangement or compromise (within the meaning given by section 74(2) of the Taxes Act 1988).

Part 6 Special computational provisions

Derivative contracts for unallowable purposes

23 (1) Where in any accounting period a derivative contract of a company has an unallowable purpose, this paragraph shall apply for the purpose of determining the credits and debits which fall, in the case of the company, to be brought into account for the purposes of this Schedule.

(2) Subject to sub-paragraph (4), the credits to be brought into account in the case of the derivative contract for the accounting period shall not include so much of the exchange credits given by the authorised accounting method used as respects the contract as, on a just and reasonable apportionment, is referable to the unallowable purpose.

(3) Subject to sub-paragraph (4), the debits to be brought into account in the case of the derivative contract for the accounting period shall not include so much of the debits given by the authorised accounting method used as respects the contract as, on a just and reasonable apportionment, is referable to the unallowable purpose.

(4) If, in the case of the derivative contract,--

(a) the amount of the debits referable to the unallowable purpose, in accordance with sub-paragraph (3), for that accounting period, exceeds

(b) the amount of the exchange credits referable to that purpose, in accordance with sub-paragraph (2), for that accounting period,

the difference between the amounts (the "net loss") may be brought into account as a debit to the extent permitted by sub-paragraph (5).

(5) An amount of accumulated net losses may be brought into account for an accounting period if, and to the extent that, there is for that period an amount of accumulated credits (other than exchange credits).

(6) For the purposes of sub-paragraph (5) the amount of accumulated net losses is, in relation to an accounting period,--

(a) the amount of any net loss arising, in the case of the derivative contract, for that accounting period or any earlier accounting period, in accordance with sub-paragraph (4), less

(b) the amount of any such net loss as was brought into account in accordance with sub-paragraph (5) in any earlier accounting period.

(7) For the purposes of sub-paragraph (5) the amount of accumulated credits (other than exchange credits) is, in relation to an accounting period,--

(a) the amount of any credits (other than exchange credits) arising, in the case of the derivative contract, for that accounting period or any earlier accounting period, less

(b) an amount equal to the amount of any net loss, arising in the case of the derivative contract, which was brought into account in accordance with sub-paragraph (5) in any earlier accounting period.

(8) Amounts which, by virtue of this paragraph, are not brought into account for the purposes of this Schedule as respects any matter are in consequence also amounts which, in accordance with paragraph 1(2), are not to be brought into account for the purposes of corporation tax as respects that matter apart from this Schedule.

(9) For the purposes of this paragraph, a credit is an exchange credit, in the case of a company, to the extent that it is attributable to any exchange gains arising to the company which, by virtue of paragraph 16, are included in the reference to the profits arising to the company in paragraph 15(1)(a).

(10) This paragraph is supplemented by paragraph 24.

Derivative contracts for unallowable purposes: supplementary

24 (1) For the purposes of paragraph 23 a derivative contract to which a company is party shall be taken to have an unallowable purpose in an accounting period where the purposes for which, at times during that period, the company--

(a) is party to the contract, or

(b) enters into transactions which are related transactions by reference to that contract,

include a purpose ("the unallowable purpose") which is not amongst the business or other commercial purposes of the company.

(2) For the purposes of this paragraph the business and other commercial purposes of a company do not include the purposes of any part of its activities in respect of which it is not within the charge to corporation tax.

(3) For the purposes of this paragraph, where one of the purposes for which a company--

(a) is party to a derivative contract at any time, or

(b) enters into a transaction which is a related transaction by reference to any derivative contract of the company,

is a tax avoidance purpose, that purpose shall be taken to be a business or other commercial purpose of the company only where it is not the main purpose, or one of the main purposes, for which the company is party to the contract at that time or, as the case may be, for which the company enters into that transaction.

(4) The reference in sub-paragraph (3) to a tax avoidance purpose is a reference to any purpose that consists in securing a tax advantage (whether for the company or any other person).

(5) In this paragraph "tax advantage" has the same meaning as in Chapter 1 of Part 17 of the Taxes Act 1988 (tax avoidance).

Debits and credits treated as relating to capital expenditure

25 (1) This paragraph applies where any debit or credit given by an authorised accounting method for any accounting period in respect of a company's derivative contract is allowed by generally accepted accounting practice to be treated, in the accounts of the company, as an amount brought into account in determining the value of a fixed capital asset or project.

(2) Notwithstanding the application to it of the treatment allowed by generally accepted accounting practice, the debit or credit shall be brought into account for the purposes of corporation tax, for the accounting period for which it is given, in the same way as a debit or credit which, in accordance with generally accepted accounting practice, is brought into account in determining the company's profit or loss for that period.

(3) No debit may be brought into account by virtue of this paragraph if it is taken into account in arriving at the amount of expenditure in relation to which a debit may be given by Schedule 29 to this Act.

Transfers of value to connected companies

26 (1) This paragraph applies where--

(a) as a result of the expiry of an option of a company which, until its expiry, was a derivative contract of the company, there is a transfer of value by the company ("the transferor") to a company which is a connected company in relation to it ("the transferee"), and

(b) the transferee is not chargeable to corporation tax, in respect of the derivative contract, under or by virtue of this Schedule.

(2) In order to determine, for the purposes of sub-paragraph (1)(a), whether there is a transfer of value, it shall be assumed that--

(a) if there had not been a connection between the transferor and the transferee, the option would not have expired, and

(b) if there had not been such a connection, it would have been exercised on the date on which it expired.

(3) Where this paragraph applies in relation to the expiry of the option of the transferor, the transferor shall bring the appropriate amount into account in accordance with paragraph 15 for the appropriate accounting period as a credit in respect of the derivative contract.

(4) In sub-paragraph (3)--

(a) the appropriate accounting period is the accounting period of the transferor in which the option expired, and

(b) the appropriate amount is the amount (if any) paid by the transferor to the transferee for the grant of the option by the transferee.

(5) In this paragraph "option" has the same meaning as in paragraph 12, apart from sub-paragraph (10).

(6) For the purposes of this paragraph, a company is a connected company in relation to another company if, in the accounting period in question, there is a connection between the company and that other company; and whether there is a connection between those companies shall be determined in accordance with sections 87(3) and (4) and 87A of the Finance Act 1996 (c. 8) (disregarding section 88 of that Act).

Exchange gains and losses where derivative contracts not on arm's length terms

27 (1) Sub-paragraph (2) applies where--

(a) a company is party to a derivative contract in an accounting period,

(b) as regards the derivative contract, an exchange gain or exchange loss arises to the company for the accounting period in question, and

(c) the profits and losses of the company fall by virtue of Schedule 28AA to the Taxes Act 1988 (provision not at arm's length) to be computed for tax purposes as if the company were not party to the derivative contract.

(2) Where this sub-paragraph applies, any exchange gains and losses which arise to the company from the derivative contract for the accounting period in question shall be left out of account in determining the credits and debits which are, in the case of the company, to be brought into account for the purposes of this Schedule.

(3) Sub-paragraph (4) applies where--

(a) a company is party to a derivative contract in an accounting period,

(b) as regards the derivative contract, an exchange gain or exchange loss arises to the company for the accounting period in question, and

(c) the profits and losses of the company fall by virtue of Schedule 28AA to the Taxes Act 1988 to be computed for tax purposes as if the terms of the derivative contract were those that would have been agreed by the company and the other party to the derivative contract had they been dealing at arm's length.

(4) Where this sub-paragraph applies, the credits and debits which are, in the case of the company, to be brought into account for the purposes of this Schedule shall be determined on the assumption that, in the accounting period in question, the amount of any exchange gain or loss arising to the company from the derivative contract is the adjusted amount.

(5) In sub-paragraph (4) the "adjusted amount" is the amount of an exchange gain or loss (including an exchange gain of nil) which would have arisen from the derivative contract if the terms of the contract were those that would have been agreed by the company and the other party to the derivative contract had they been dealing at arm's length.

Transactions within groups

28 (1) This paragraph applies where, as a result of any transaction or series of transactions falling within sub-paragraph (2), one of the companies there referred to ("the transferee company") directly or indirectly replaces the other ("the transferor company") as a party to a derivative contract.

(2) The transactions or series of transactions referred to in sub-paragraph (1) are--

(a) a related transaction between two companies that are--

(i) members of the same group, and

(ii) within the charge to corporation tax in respect of that transaction;

(b) a series of transactions having the same effect as a related transaction between two companies each of which--

(i) has been a member of the same group at any time in the course of that series of transactions, and

(ii) is within the charge to corporation tax in respect of the related transaction;

(c) a transfer between two companies of business consisting of the effecting or carrying out of contracts of long-term insurance which has effect under an insurance business transfer scheme; and

(d) any transfer between two companies which is a qualifying overseas transfer within the meaning of paragraph 4A of Schedule 19AC to the Taxes Act 1988 (transfer of business of overseas life insurance company).

(3) The credits and debits to be brought into account for the purposes of this Schedule in the case of the two companies shall be determined as follows--

(a) the transaction, or series of transactions, by virtue of which the replacement takes place shall be disregarded except for the purpose of identifying the company in whose case any credit or debit not relating to that transaction, or those transactions, is to be brought into account; and

(b) the transferor company and the transferee company shall be deemed (except for that purpose) to be the same company.

(4) References in this paragraph to one company replacing another as a party to a derivative contract shall include references to a company becoming a party to any derivative contract which confers rights or imposes duties which are equivalent to any rights or duties of the other company under a derivative contract of which that other company has previously ceased to be a party.

(5) In this paragraph "insurance business transfer scheme" means a scheme falling within section 105 of the Financial Services and Markets Act 2000 (c. 8), including an excluded scheme falling within Case 2, 3 or 4 of subsection (3) of that section.

(6) In this paragraph references to companies being members of the same group of companies shall be construed in accordance with section 170 of the Taxation of Chargeable Gains Act 1992 (c. 12).

(7) This paragraph has effect subject to paragraphs 29 and 30.

Transactions within groups: exceptions relating to insurance

29 (1) Paragraph 28 does not apply by virtue of sub-paragraph (2)(a) or (b) of that paragraph in relation to any transfer of an asset, or of any rights or duties under or interest in an asset, where the asset was within one of the categories set out in section 440(4)(a) to (e) of the Taxes Act 1988 (assets held for certain categories of long term business) either immediately before the transfer or immediately afterwards.

(2) Paragraph 28 does not apply by virtue of sub-paragraph (2)(c) or (d) of that paragraph in relation to any transfer of an asset, or of any rights or duties under or interest in an asset, where the asset--

(a) was an asset within one of the categories set out in section 440(4) of the Taxes Act 1988 immediately before the transfer, and

(b) is not an asset within that category immediately afterwards.

(3) For the purposes of sub-paragraph (2) above, where one of the companies is an overseas life insurance company an asset shall be taken to be within the same category both immediately before the transfer and immediately afterwards if it--

(a) was an asset within one category immediately before the transfer, and

(b) is an asset within the corresponding category immediately afterwards.

(4) In this paragraph "overseas life insurance company" has the same meaning as in Chapter 1 of Part 12 of the Taxes Act 1988.

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