Section 576: “Derivative contract”
1511.This section sets out the conditions under which a contract of a company is a derivative contract. It is based on paragraph 2(1) of Schedule 26 to FA 2002.
1512.The first condition, that it is a “relevant contract” (defined in section 577), limits the application of the term “derivative contract” to contracts that derive their value from underlying subject matter (defined in section 583) which is subject to changes in market prices or other factors.
1513.The second condition, that it meets the “accounting conditions” in section 579, means that the contract either:
is treated by the relevant accounting standards as a derivative or as a financial asset or liability; or
has underlying subject matter within certain categories.
1514.The third condition, that section 589 (contracts excluded because of underlying subject matter: general) or “any other provision of the Corporation Tax Acts” does not prevent it being a derivative contract, cuts down the scope of this Part, particularly in relation to contracts whose underlying subject matter is land or shares. Section 226(3) of FA 1994 (Lloyd’s underwriters: relevant contract forming part of a premium trust fund not to be a derivative contract) is an example of such another provision.