Finance Act 2002 (c. 23)

(The document as of February, 2008)

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(3) Where--

(a) a company ceases to be party to a derivative contract in an accounting period (the "cessation period"),

(b) profits or losses arise to the company from the derivative contract or a related transaction in the cessation period, and

(c) the credits or debits brought into account for the purposes of this Schedule for the cessation period do not include credits or debits which represent the whole of those profits or losses,

credits or debits in respect of so much of those profits or losses as are not represented by credits or debits brought into account for the cessation period shall continue to be brought into account under this Schedule over one or more subsequent accounting periods ("post-cessation periods") as in the case of a derivative contract to which the company is party in those periods and sub-paragraphs (4) and (5) shall apply.

(4) In any case falling within sub-paragraph (3), any question--

(a) whether, in a post-cessation period, the company is, or is to any extent, party to the contract for the purposes of a trade carried on by it, or

(b) whether, in a post-cessation period, the contract is to any extent referable to a particular business, or a particular class, category or description of business, carried on by the company,

shall be determined by reference to the circumstances immediately before the company ceased to be party to the contract instead of the circumstances in the post-cessation period.

(5) In any case falling within sub-paragraph (3), any question--

(a) whether the contract has to any extent a particular purpose in a post-cessation period, or

(b) whether there is a connection between the company and any other person for a post-cessation period,

shall be determined by reference to the circumstances in the cessation period instead of the circumstances in the post-cessation period.

(6) For the purposes of the Corporation Tax Acts references to a person's derivative contracts and to a person's being party to a derivative contract shall be construed accordingly.

General interpretation

54 (1) In this Schedule--

"authorised accounting method", "authorised accruals basis of accounting" and "authorised mark to market basis of accounting" shall be construed in accordance with paragraph 17;
"bank" means any of the following--
(a)
the Bank of England;
(b)
any person falling within section 840A(1)(b) of the Taxes Act 1988; and
(c)
any firm falling within section 840A(1)(c) of that Act;
"contract for differences" shall be construed in accordance with paragraph 12;
"contract of insurance" has the meaning given by Article 3(1) of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (S.I. 2001/544);
"derivative contract" shall be construed in accordance with paragraph 2;
"exchange gain" and "exchange loss" shall be construed in accordance with sub-paragraphs (2) and (3);
"fair value" has the meaning given by paragraph 17;
"future" has the meaning given by paragraph 12;
"insurance company" means a company which effects or carries out contracts of insurance;
"intangible fixed assets" has the meaning given by paragraph 12;
"investment trust" is a company approved for the purposes of section 842 of the Taxes Act 1988 (investment trusts) for an accounting period;
"life assurance business" has the same meaning as in section 431 of the Taxes Act 1988;
"long-term insurance business" means business which consists of the effecting and carrying out of contracts which fall within Part II of Schedule 1 to the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 and "contract of long-term insurance" means any contract which falls within that Part of that Schedule;
"non-life mutual business" means any mutual trading, or any mutual insurance or other mutual business, which (in either case) is not life assurance business;
"option" has the meaning given by paragraph 12;
"related transaction" has the meaning given by paragraph 15;
"relevant contract" has the meaning given by paragraph 2;
"shares", in relation to a company, has (except in paragraphs 39 and 40) the meaning given by paragraph 12;
"statutory accounts" has the meaning given by paragraph 52;
"UK company" means a company incorporated or formed under the law of a part of the United Kingdom;
"underlying subject matter" has the meaning given by paragraph 11;
"warrant" has the meaning given by paragraph 12.

(2) References in this Schedule to exchange gains or exchange losses, in the case of any company, are references respectively to--

(a) profits or gains, or

(b) losses,

which arise as a result of comparing at different times the expression in one currency of the whole or some part of the valuation put by the company in another currency on an asset or liability of the company.

If the result of such a comparison is that neither an exchange gain nor an exchange loss arises, then for the purposes of this Schedule an exchange gain of nil shall be taken to arise in the case of that comparison.

(3) A reference to an exchange gain or loss from a company's derivative contract is a reference to an exchange gain or loss arising to a company in relation to a derivative contract of the company.

(4) In this Schedule "financial trader" means--

(a) any person who--

(i) falls within section 31(1)(a), (b) or (c) of the Financial Services and Markets Act 2000 (c. 8), and

(ii) has permission under that Act to carry on one or more of the activities specified in Article 14 and, in so far as it applies to that Article, Article 64 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (S.I. 2001/544); or

(b) any person not falling within paragraph (a) who is approved by the Board for the purposes of this paragraph.

Section 83

SCHEDULE 27 Derivative contracts: minor and consequential amendments

The Taxes Act 1988

1 The Taxes Act 1988 is amended as follows.

2 In section 15(1) (Schedule A) in paragraph 2(3) of Schedule A (profits of Schedule A business computed without regard to certain items) for the third indent (which relates to qualifying payments within Chapter 2 of Part 4 of the Finance Act 1994 (c. 9)) substitute--

" --credits or debits within Schedule 26 to the Finance Act 2002 (derivative contracts). " .

3 (1) In section 128 (gains arising in course of dealing in commodity and financial futures etc) in the first sentence--

(a) at the beginning insert "(1)",

(b) after "(1)", as so inserted, insert "For the purposes of income tax,", and

(2) At the end of the first sentence of that section (as amended by sub-paragraph (1)) insert--

" (2) For the purposes of corporation tax, any gain arising to any company in the course of dealing in financial futures or in qualifying options, which apart from this subsection would constitute profits or gains chargeable to tax under Schedule D otherwise than as the profits of a trade, shall not be chargeable to tax under Case V or VI of Schedule D. " .

(3) At the beginning of the second sentence (and after subsection (2) as inserted by sub-paragraph (2)) insert "(3)".

4 (1) In section 399 (dealings in commodity futures etc: withdrawal of loss relief) in subsection (1) (losses, arising in course of dealing where gains would constitute non-trading profits or gains chargeable under Schedule D for the purposes of the Tax Acts, not to be allowable against profits or gains chargeable to tax under Schedule D)--

(a) for "section 128 above" substitute "section 128(1) above", and

(b) for "for the purposes of the Tax Acts" substitute "for the purposes of the Income Tax Acts".

(2) After subsection (1A) of that section insert--

" (1B) If, apart from section 143(1) of the 1992 Act or section 128(2) above, gains arising in the course of dealing in financial futures or in qualifying options would constitute, for the purposes of the Corporation Tax Acts, profits and gains chargeable to tax under Case V or VI of Schedule D, then any loss arising in the course of that dealing shall not be allowable against profits and gains which are chargeable to tax under Case V or VI of Schedule D. " .

5 In section 440 (transfers between categories of assets held by insurance companies) after subsection (2A) (treatment of deemed disposal and re-acquisition of loan relationships) insert--

" (2B) Where under subsection (1) or (2) above there is a deemed disposal and re-acquisition of any derivative contract of a company, any authorised accounting method used as respects that contract for the purposes of Schedule 26 to the Finance Act 2002 shall be applied as respects that contract as if the contract that is deemed to be disposed of and the contract that is deemed to be re-acquired were different assets. " .

6 Omit section 468AA (authorised unit trusts: futures and options).

7 (1) Section 468L (interest distributions) is amended as follows.

(2) In subsection (9) (meaning of "qualifying investments") after paragraph (e) insert--

" (f) derivative contracts whose underlying subject matter consists wholly of any one or more of the matters referred to in paragraphs (a) to (e) above;

(g) contracts for differences whose underlying subject matter consists wholly of interest rates or creditworthiness or both of those matters. " .

(3) In subsection (11) (assumption as to investments of other authorised unit trust which are to be regarded as qualifying investments) after "within paragraphs (a) to (c)" insert ", (f) and (g)".

(4) After subsection (12G) insert--

" (12H) For the purposes of this section--

"contract for differences" has the same meaning as in paragraph 12 of Schedule 26 to the Finance Act 2002;
"derivative contract" means--
(a)
a contract which is a derivative contract within the meaning of that Schedule, or
(b)
a contract which is, in the accounting period in question, treated as if it were a derivative contract by virtue of paragraph 36 of that Schedule (contracts relating to holdings in unit trust schemes, open-ended investment companies and offshore funds);
"underlying subject matter" has the same meaning as in paragraph 11 of that Schedule. " .

8 In section 501A (supplementary charge in respect of ring fence trades) in subsection (5) (computation of financing costs) for paragraph (c) (any trading profit or loss, under Chapter 2 of Part 4 of the Finance Act 1994 (c. 9) (interest rate and currency contracts), in relation to debt finance) substitute--

" (c) any credit or debit falling to be brought into account under Schedule 26 to the Finance Act 2002 (derivative contracts) in relation to debt finance; " .

9 In section 768B (change in ownership of investment company: deductions generally)--

(a) in subsection (10) (restriction of debits brought into account in respect of loan relationships) at the end insert "(including debits so brought into account by virtue of paragraph 14(3)of Schedule 26 to the Finance Act 2002)", and

(b) in subsection (13) (modified application of section 768) after "its loan relationships" insert "(or its derivative contracts by virtue of paragraph 14(3) of Schedule 26 to the Finance Act 2002)".

10 In section 768C (deductions: asset transferred within group) in subsection (9) (restriction of debits to be brought into account) at the end insert "(including debits so brought into account by virtue of paragraph 14(3) of Schedule 26 to the Finance Act 2002)".

11 In section 798B (restriction of relief on certain interest and dividends: meaning of "financial expenditure") in subsection (5) (meaning of "qualifying losses") for paragraph (b) (losses brought into account for purposes of Chapter 2 of Part 4 of the Finance Act 1994) substitute--

" (b) the amount (if any) by which debits brought into account in respect of a derivative contract for the purposes of Schedule 26 to the Finance Act 2002 (derivative contracts) exceed credits so brought into account; " .

12 (1) Section 807A (disposals and acquisitions of company loan relationships with or without interest) is amended as follows.

(2) In subsection (2)(b)(ii) (foreign tax to be disregarded so far as attributable to qualifying payment within Chapter 2 of Part 4 of the Finance Act 1994 relating to a time when a company is not party to a contract)--

(a) for "relevant qualifying payment" substitute "relevant payment", and

(b) for "the interest rate or currency contract concerned" substitute "the derivative contract concerned".

(3) In subsection (7) (definitions) insert the following definition at the appropriate place--

" "relevant payment" means a payment the amount of which falls to be determined (wholly or mainly) by applying to a notional principal amount specified in a derivative contract, for a period so specified, a rate the value of which at all times is the same as that of a rate of interest so specified; " .

(4) In that subsection, omit the definition of "relevant qualifying payment".

13 In section 834(1) (interpretation of the Corporation Tax Acts) insert the following definition at the appropriate place--

" "derivative contract" has the same meaning as it has for the purposes of Schedule 26 to the Finance Act 2002; " .

14 (1) Schedule 5AA (guaranteed returns on transactions in futures and options) is amended as follows.

(2) In paragraph 1 (profits and gains of transactions with guaranteed returns chargeable to tax under Schedule 5AA to the Taxes Act 1988)--

(a) omit paragraphs (b) and (c) of sub-paragraph (2) (exceptions for profits and gains arising from a qualifying contract and profits and gains arising to an authorised unit trust),

(b) omit sub-paragraph (3) (definitions of "qualifying company" and "qualifying contract"),

(c) in sub-paragraph (5) (when loss in transaction sustained for purposes of sections 392 and 396 of the Taxes Act 1988), omit "and 396",

(d) in sub-paragraph (6) (specified amounts not to be brought into account for purposes of income tax, corporation tax or capital gains tax except under Schedule 5AA or section 392 or 396)--

(i) omit ", corporation tax", and

(ii) omit "or 396", and

(e) omit sub-paragraph (7) (bringing receipts into account in any Case I computation made in respect of life insurance).

(3) In paragraph 2 (transactions to which Schedule 5AA applies) omit sub-paragraph (3) (application of Schedule to disposals of futures or options to which section 93A of the Finance Act 1996 (c. 8) refers).

(4) In paragraph 4 (meaning of disposals of futures or options) omit sub-paragraph (4A) (application of paragraph to associated transactions to which section 93A of the Finance Act 1996 refers).

(5) In paragraph 4A (futures running to delivery and options exercised)--

(a) in sub-paragraph (5)(b) (loss in deemed transaction brought into account for purposes of section 392 or 396 of the Taxes Act 1988 in accordance with paragraph 1(5) of Schedule 5AA), omit "or 396", and

(b) omit sub-paragraph (10A) (application of paragraph to associated transactions to which section 93A of the Finance Act 1996 refers).

(6) In paragraph 6 (meaning of related transactions) omit sub-paragraph (3A) (application of paragraph to associated transactions to which section 93A of the Finance Act 1996 refers).

(7) Omit paragraph 9 (apportionment in the case of insurance companies).

15 (1) Schedule 28AA (provision not at arm's length) is amended as follows.

(2) In paragraph 8 (foreign exchange gains and losses and financial instruments) in sub-paragraph (1) (exceptions)--

(a) after "sub-paragraph (3)" insert "and sub-paragraph (4)", and

(b) for paragraph (b) (which relates to Chapter 2 of Part 4 of the Finance Act 1994 (c. 9)) substitute--

" (b) Schedule 26 to the Finance Act 2002 (derivative contracts) in respect of exchange gains and losses (as defined in paragraph 54 of that Schedule), " .

(3) In that paragraph, after sub-paragraph (3) (which is inserted by Schedule 23 to this Act) insert--

" (4) Sub-paragraph (1) above shall not affect so much of paragraph 27 of Schedule 26 to the Finance Act 2002 (derivative contracts: exchange gains or losses where derivative contract not on arm's length terms) as has effect by reference to whether profits or losses fall to be computed by virtue of this Schedule as if a company were not party to a derivative contract or as if the terms of the contract to which it is party were different. " .

The Finance Act 1994

16 In section 226 (provisions of the Finance Act 1993 (c. 34) and Finance Act 1994 which are not to apply in the case of Lloyd's underwriters) for subsection (3) (contracts and options in premium trust fund of corporate member not to be qualifying contracts for purposes of Chapter 2 of Part 4 of the Finance Act 1994) substitute--

" (3) No relevant contract (within the meaning of Schedule 26 to the Finance Act 2002) forming part of a premium trust fund of a corporate member shall be a derivative contract. " .

The Finance Act 1996

17 The Finance Act 1996 (c. 8) is amended as follows.

18 (1) Section 93A (loan relationships linked to the value of chargeable assets: guaranteed returns) is amended as follows.

(2) In subsection (1) (creditor relationships to which section applies)--

(a) in paragraph (b) for "a disposal of futures or options" substitute "a derivative contract falling within paragraph 6 of Schedule 26 to the Finance Act 2002 ("an associated derivative contract")", and

(b) in paragraph (c) for "the disposals of futures or options" substitute "the associated derivative contracts".

(3) In subsection (2) (transactions designed to produce guaranteed return)--

(a) for "disposals of futures or options" substitute "associated derivative contracts", and

(b) for "any one or more of the disposals" substitute "any one or more of the associated derivative contracts".

(4) In subsection (3) (production of a guaranteed return)--

(a) for "any one or more of the disposals of futures or options" substitute "any one or more of the associated derivative contracts", and

(b) omit paragraph (a).

(5) In subsection (5) (meaning of "underlying subject matter") for paragraph (b) substitute--

" (b) the references, in relation to an associated derivative contract, to the underlying subject matter are to be construed in accordance with paragraphs 6(2)(a) and 11 of Schedule 26 to the Finance Act 2002. " .

(6) Omit subsection (7) (use of terms appearing in Schedule 5AA to the Taxes Act 1988).

19 (1) Section 101 (financial instruments) is amended as follows.

(2) In subsection (1) (Chapter 2 of Part 4 of Finance Act 1994 not to apply to profit and loss on certain financial instruments brought into account under Chapter 2 of Part 4 of Finance Act 1996)--

(a) for "Chapter II of Part IV of the Finance Act 1994 (provisions relating to certain financial instruments)" substitute "Schedule 26 to the Finance Act 2002 (provisions relating to derivative contracts)",

(b) for "in accordance with that Chapter" substitute "in accordance with that Schedule", and

(3) Omit subsections (2) to (6).

20 (1) Schedule 10 (loan relationships: collective investment schemes) is amended as follows.

(2) In paragraph 8 (non-qualifying investments test) in sub-paragraph (2) (meaning of "qualifying investments") after paragraph (d) insert--

" (e) derivative contracts whose underlying subject matter consists wholly of any one or more of the matters referred to in paragraphs (a) to (d) above;

(f) contracts for differences whose underlying subject matter consists wholly of interest rates or creditworthiness or both of those matters. " .

(3) In that paragraph, in sub-paragraph (4) (relevant assumption in a case where a qualifying investment is a qualifying holding) after "within paragraphs (a) to (c)" insert ", (e) and (f)".

(4) In that paragraph, after sub-paragraph (7D) insert--

" (7E) For the purposes of this paragraph--

"contract for differences" has the same meaning as in paragraph 12 of Schedule 26 to the Finance Act 2002;
"derivative contract" means--
(a)
a contract which is a derivative contract within the meaning of that Schedule, or
(b)
a contract which is, in the accounting period in question, treated as if it were a derivative contract by virtue of paragraph 36 of that Schedule (contracts relating to holdings in unit trust schemes, open-ended investment companies and offshore funds);
"underlying subject matter" has the same meaning as in paragraph 11 of that Schedule. " .

21 Omit Schedule 12 (meaning of debt contract or option).

The Finance Act 2000

22 The Finance Act 2000 (c. 17) is amended as follows.

23 (1) Schedule 22 (tonnage tax) is amended as follows.

(2) In paragraph 50 (income which, otherwise than under Schedule 22 to the Finance Act 2000, falls to be taken into account as trading income from trade consisting of tonnage tax activities) in sub-paragraph (2), for paragraph (c) substitute--

" (c) any credit falling to be brought into account under Schedule 26 to the Finance Act 2002 (derivative contracts). " .

(3) In paragraph 63 (ring-fencing of accounting periods where company is tonnage tax company: meaning of "finance costs") in sub-paragraph (2), for paragraph (b) substitute--

" (b) any credit or debit falling to be brought into account under Schedule 26 to the Finance Act 2002 (derivative contracts) in relation to debt finance; " .

The Finance Act 2002

24 The Finance Act 2002 is amended as follows.

25 Section 78 (which amends the provision made by Schedule 5AA to the Taxes Act 1988 as regards corporation tax in relation to guaranteed returns on transactions involving futures and options, provision as regards which is made in Schedule 26 in relation to accounting periods beginning on or after 1st October 2002) shall cease to have effect.

26 In Schedule 29 (taxation of intangible fixed assets) in paragraph 75 (which provides for the Schedule not to apply to financial assets) for sub-paragraph (3)(b) (financial assets to include qualifying contracts within Chapter 2 of Part 4 of the Finance Act 1994) substitute--

" (b) derivative contracts (see Part 2 of Schedule 26 to this Act), " .

Section 83

SCHEDULE 28 Derivative contracts: transitional provisions etc

Anti-avoidance: change of accounting period

1 (1) This paragraph applies where--

(a) a company changes its accounting date in such a way that an accounting period of the company, which begins on or after 1st October 2001, ends before 30th September 2002; and

(b) the change of accounting date is or was made for the purpose, or for purposes which include the purpose, specified in sub-paragraph (2).

(2) The purpose is that of securing, in the case of any subsequent accounting period beginning before 1st October 2002,--

(a) that where an amount, or a bigger amount, would have fallen to be brought into account as a credit under Schedule 26 if that Schedule had had effect in relation to the period, no amount, or a smaller amount, falls to be brought into account in accordance with section 159 or 160 of the Finance Act 1994 (c. 9); or

(b) that where no amount, or a smaller amount, would have fallen to be brought into account as a debit under Schedule 26 if that Schedule had had effect in relation to the period, an amount, or a bigger amount, falls to be brought into account in accordance with section 159 or 160 of the Finance Act 1994 (c. 9).

(3) Where this paragraph applies, Schedule 26 shall have effect in relation to the subsequent accounting period mentioned in sub-paragraph 2 as if it were an accounting period beginning on or after 1st October 2002.

(4) For the purposes of this paragraph, references to Schedule 26 include references to--

(a) section 83(2), and

(b) any repeal of any enactment which is consequential on any provision made by or under that Schedule.

Qualifying contracts to which company ceases to be party before commencement day

2 (1) This paragraph applies if the conditions in sub-paragraphs (2) and (3) are satisfied in relation to any contract of a company.

(2) The first condition is that the company was a party to a qualifying contract (within the meaning of Chapter 2 of Part 4 of the Finance Act 1994) before its commencement day, but is not a party to it on that commencement day.

(3) The second condition is that, if the company had been a party to the contract on its commencement day, the contract would have been a derivative contract.

(4) To the extent that amounts have been brought into account in computing, in accordance with Chapter 2 of Part 4 of the Finance Act 1994, the profits or losses accruing to the company from the contract in an old period of the company, they shall not be brought into account again by the company as credits or debits given in respect of that contract for the first new period or any subsequent accounting period of the company by Schedule 26.

Qualifying contracts which become derivative contracts

3 (1) This paragraph applies if the conditions in sub-paragraphs (2) and (3) are satisfied in relation to any contract of a company.

(2) The first condition is that the company is a party to the contract immediately before and on its commencement day.

(3) The second condition is that the contract--

(a) was a qualifying contract (within the meaning of Chapter 2 of Part 4 of the Finance Act 1994) immediately before the company's commencement day, and

(b) as from that day is a derivative contract.

(4) If the sum of the amounts that would, on the assumptions in sub-paragraph (6)(a) and (b), have fallen to be brought into account as regards the contract in accordance with--

(a) Chapter 2 of Part 2 of the Finance Act 1993 (c. 34), or

(b) Chapter 2 of Part 4 of the Finance Act 1994,

for the purposes of computing corporation tax for an old period of the company is different from the sum of the amounts that would, on the assumption in sub-paragraph (6)(c), have fallen to be brought into account as regards the contract in accordance with Schedule 26 for those purposes (if that Schedule had had effect in relation to that period), sub-paragraph (5) shall apply as regards the amount of that difference.

(5) Where this sub-paragraph applies, the amount of the difference shall be brought into account--

(a) as a credit under Schedule 26 in the company's first new period, if a greater profit or smaller loss would have been brought into account for the old period under that Schedule, or

(b) as a debit under that Schedule in the company's first new period, if a smaller profit or greater loss would have been brought into account for the old period under that Schedule.

(6) The assumptions referred to in sub-paragraph (4) are that--

(a) section 137 of the Finance Act 1993 (c. 34),

(b) sections 165 to 168A of the Finance Act 1994 (c. 9), and

would not have had effect in the case of the contract.

Contracts which become derivative contracts: chargeable assets

4 (1) This paragraph applies if the conditions in sub-paragraphs (2) to (4) are satisfied in relation to any contract of a company.

(2) The first condition is that the company is a party to the contract immediately before and on its commencement day.

(3) The second condition is that the contract--

(a) was not a qualifying contract (within the meaning of Chapter 2 of Part 4 of the Finance Act 1994) immediately before the company's commencement day, but

(b) as from that day is a derivative contract.

(4) The third condition is that the contract was, immediately before the company's commencement day, a chargeable asset.

(5) Where this paragraph applies, the company shall, when it ceases to be a party to the contract, bring into account, for the accounting period in which it ceases to be a party to the contract, the amount of any chargeable gain or allowable loss which would have been treated as accruing to the company on the assumption--

(a) that it had made a disposal of the asset immediately before its commencement day, and

(b) that the disposal had been for a consideration equal to the value (if any) given to the contract in the accounts of the company at the end of the company's accounting period immediately before its first new period.

(6) Sub-paragraph (5) has effect subject to sub-paragraph (7).

(7) The company may elect that a debit representing the amount of any allowable loss, which under sub-paragraph (5) is to be brought into account for the accounting period in which it ceases to be a party to the contract, shall be brought into account for that accounting period as if it were a non-trading debit 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 a loan relationship of the company.

(8) An election under sub-paragraph (7) may only be made within the period of two years following the end of the accounting period in which the company ceases to be a party to the contract.

(9) For the purposes of this paragraph an asset is a chargeable asset if any gain accruing on the disposal of the asset by the company would be a chargeable gain for the purposes of the Taxation of Chargeable Gains Act 1992 (c. 12) (and includes any obligations under futures contracts which, by virtue of section 143 of that Act, are regarded as assets to the disposal of which that Act applies).

(10) This paragraph has effect subject to paragraph 5.

Contracts: election to treat as two assets

5 (1) This paragraph applies if the conditions in sub-paragraphs (2) to (4) are satisfied in relation to any contract of a company.

(2) The first condition is that the company is a party to the contract immediately before and on its commencement day.

(3) The second condition is that the contract--

(a) was not a qualifying contract (within the meaning of Chapter 2 of Part 4 of the Finance Act 1994 (c. 9)) immediately before the company's commencement day, but

(b) as from that day would, but for an election under sub-paragraph (5) of this paragraph, be a derivative contract to which paragraph 7 of Schedule 26 (contracts designed to secure guaranteed amount) applies.

(4) The third condition is that the contract was, immediately before the company's commencement day, a chargeable asset.

(5) Where this paragraph applies the company may elect that its contract shall be treated for the purposes of the Corporation Tax Acts as if it were--

(a) a creditor relationship of the company which is a zero coupon bond (within the meaning of paragraph 48 of Schedule 26), and

(b) an option of the company whose underlying subject matter is the same as the underlying subject matter of the contract to which this paragraph applies;

and sub-paragraphs (4) to (6) of that paragraph shall apply to a creditor relationship and an option arising under this sub-paragraph as they apply to a creditor relationship and an option arising under paragraph 48(2) of Schedule 26.

(6) An election under sub-paragraph (5) in relation to a contract--

(a) may only be made within the period of two years following the end of the company's first new period;

(b) has effect for the company's first new period and all subsequent accounting periods of the company; and

(7) Where an election under sub-paragraph (5) has been made by a company in relation to a contract, the company shall, when it ceases to be a party to the contract, bring into account, for the accounting period in which it ceases to be a party to the contract, the amount of any chargeable gain or allowable loss which would have been treated as accruing to the company on the assumption--

(a) that it had made a disposal of the asset immediately before its commencement day, and

(8) Sub-paragraph (7) has effect subject to sub-paragraph (9).

(9) The company may elect that a debit representing the amount of any allowable loss, which under sub-paragraph (7) is to be brought into account for the accounting period in which it ceases to be a party to the contract, shall be brought into account for that accounting period as if it were a non-trading debit 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 a loan relationship of the company.

(10) An election under sub-paragraph (9) may only be made within the period of two years following the end of the accounting period in which the company ceases to be a party to the contract.

(11) For the purposes of this paragraph references to an asset being a chargeable asset shall be construed in accordance with paragraph 4(9).

(12) In this paragraph "option" and "underlying subject matter" have the same meaning as in Schedule 26.

Contracts which become derivative contracts: contracts within Schedule 5AA to the Taxes Act 1988

6 (1) This paragraph applies if the conditions in sub-paragraphs (2) to (5) are satisfied in relation to any contract of a company.

(2) The first condition is that the company is a party to the contract immediately before and on its commencement day.

(3) The second condition is that the contract--

(a) was not a qualifying contract (within the meaning of Chapter 2 of Part 4 of the Finance Act 1994 (c. 9)) immediately before the company's commencement day, but

(b) as from that day is a derivative contract.

(4) The third condition is that the contract was, immediately before the company's commencement day, a transaction to which Schedule 5AA to the Taxes Act 1988 applied.

(5) The fourth condition is that, on or after the company's commencement day, a relevant event occurs.

(6) For the purposes of this paragraph a relevant event is an event which would, if Schedule 5AA to the Taxes Act 1988 had continued to apply to the contract for the purposes of corporation tax, have given rise to an amount of profits falling to be charged under that Schedule.

(7) A credit representing that amount of profits ("a relevant credit") shall be brought into account by virtue of paragraph 14(3) of Schedule 26 for the accounting period in which the relevant event occurs as if it were a non-trading credit falling to be brought into account for the purposes of Chapter 2 of Part 4 of the Finance Act 1996 in respect of a loan relationship of the company.

(8) The amount of the relevant credit is the sum of--

(a) the amount of profits which would have been chargeable under Schedule 5AA to the Taxes Act 1988 if it had continued to apply to the contract, and

(b) the amount of any debits given by Schedule 26 in respect of the contract for the first new period and any subsequent accounting period ending with the accounting period in which the relevant event occurred,

less the amount of any credits given by Schedule 26 in respect of the contract for those accounting periods.

Interpretation

7 For the purposes of this Schedule--

(a) a company's commencement day is the first day of its first accounting period to begin on or after 1st October 2002,

(b) a company's first new period is its first accounting period to begin on or after that date, and

(c) an old period of the company is any accounting period of the company ending before the first day of its first new period.

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