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Why have an accounting condition?

Accounting treatment is relevant in determining not only amounts brought into account in respect of the derivative contract 鈥�matters鈥� but also in the definition of a derivative contract.

To be a derivative contract there needs to be a 鈥榬elevant contract鈥� . A relevant contract is defined to be an 鈥榦ption鈥�, 鈥榝uture鈥� or a 鈥榗ontract for differences鈥� (CFD). The definitions of these terms in Part 7 of CTA09 are based on regulations made under the Financial Services and Markets Act 2000 (FSMA 2000). The definitions of these three terms are potentially very wide in scope, and without some further qualification they would bring in all sorts of contracts that would not normally be regarded as derivatives.

For regulatory purposes, the definitions in FSMA 2000 are limited by the FSMA 2000 (Regulated Activities Order) 2001 (RAO). Very broadly, the limitations in the RAO look at purpose, that is, whether someone entered into a futures contract for a commercial or an investment purpose, or whether a non-financial trading company entered into a contract as a hedge. But it is not practical to have to consider the purpose of each of a company鈥檚 relevant contracts before you can decide how it should be taxed.

So the legislation takes a different route. CTA09/S576 provides a definition of 鈥榙erivative contract鈥�. For a relevant contract to be a derivative contract, it must satisfy the accounting conditions in CTA09/S579 (for example, by being treated for accounting purposes as a derivative). This means that most commercial contracts - for example, an agreement to purchase a property, with completion at a later date - do not come within the derivative contract rules because they are not accounted for as derivatives (and do not otherwise satisfy the accounting conditions).

A summary of the accounting conditions is set out at CFM50215.

Excluded contracts

Section 579 is the main filter that is applied to determine whether a relevant contract qualifies as a derivative contract. When the derivative contracts regime was first introduced in 2002, a number of derivatives - principally property and equity derivatives - were excluded because of their 鈥榰nderlying subject matter鈥�. There are still some underlying subject matter exclusions (see CFM50700 onwards), but these have become considerably less important.

Other rules

Finally, two types of contract by-pass all of the filters and are explicitly treated as derivative contracts. They are:

• Contracts that have certain holdings in unit trusts, OEICs or offshore funds as their underlying subject matter (CTA09/S587 - see CFM54040); and
• 鈥楢ssociated transactions鈥� under the 鈥榮hares as debt鈥� loan relationships rules (CTA09/S588 - see CFM45260).