Derivatives

The rules governing the taxation of derivatives are primarily found in Part 7 of the Corporation Tax Act 2009 (CTA 2009) (CTA 2009, ss 570–710). Some secondary legislation is also relevant, notably the regulations known as the ‘Disregard Regs’ (the Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) Regulations 2004, SI 2004/3256).

The derivative contracts rules only apply to companies within the charge to UK corporation tax.

Derivatives and their uses

While certain kinds of businesses may trade or speculate in derivative instruments, derivatives are more usually held either as investments or to mitigate (ie hedge) a company’s exposure to a particular risk or potential liability, eg to changes in cash flow or in the fair value of assets, or to credit risk. Derivatives, such as options, futures and swaps can be used to smooth the volatility associated with interest rates, currency or commodity prices. In that sense, their use can provide certainty to a company in respect of its financial position, especially in relation to future liabilities.

A derivative is a contract between

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