Finance Act 2002

Definition of terms relating to derivative contracts U.K.

12 [F1 (1) This paragraph defines the following expressions for the purposes of this Schedule—

• a capital redemption policy (see sub-paragraph (2));

• a contract for differences (see sub-paragraphs (3) to (5));

• a depositary receipt (in relation to shares) (see sub-paragraph (17));

• designated (see sub-paragraph (13));

• a future (see sub-paragraphs (6), (7) and (10));

• a hedging relationship between a relevant contract and an asset or liability, in the case of any company (see sub-paragraph (14));

• [F2 Insurance Prudential Sourcebook (see sub-paragraph (15));]

• intangible fixed assets (see sub-paragraph (11));

• F3 ...

• loan-contract embedded derivative (see sub-paragraph (11A));

• loan-contract host contract (see sub-paragraph (11B));

• long-term insurance fund (see sub-paragraph (16));

• an option (see sub-paragraphs (8) and (10));

• original asset (see sub-paragraph (11C));

• original creditor relationship (see sub-paragraph (11D));

• shares in a company (see sub-paragraph (12));

• a warrant (see sub-paragraph (9)).]

(2) A “capital redemption policy” is a contract effected in the course of capital redemption business (within the meaning of section 458 of the Taxes Act 1988).

(3) A “contract for differences” is a contract the purpose or pretended purpose of which is to make a profit or avoid a loss by reference to fluctuations in—

(a) the value or price of property described in the contract, or

(b) an index or other factor designated in the contract.

(4) For the purposes of sub-paragraph (3)(b) an index or factor may be determined by reference to any matter and, for those purposes, a numerical value may be attributed to any variation in a matter.

(5) None of the following is a contract for differences—

(a) a future;

(b) an option;

(c) a contract of insurance;

(d) a capital redemption policy;

(e) a contract of indemnity;

(f) a guarantee;

(g) a warranty;

(h) a loan relationship.

(6) A “future” is a contract for the sale of property under which delivery is to be made—

(a) at a future date agreed when the contract is made, and

(b) at a price so agreed.

(7) For the purposes of sub-paragraph (6)(b) a price is to be taken to be agreed when the contract is made—

(a) notwithstanding that it is left to be determined by reference to the price at which a contract is to be entered into on a market or exchange or could be entered into at a time and place specified in the contract; or

(b) in a case where the contract is expressed to be by reference to a standard lot and quality, notwithstanding that provision is made for a variation in the price to take account of any variation in quantity or quality on delivery.

(8) An “option” includes a warrant.

(9) A “warrant” is an instrument which entitles the holder to subscribe for shares in a company or assets representing a loan relationship of a company; and for these purposes it is immaterial whether the shares or assets to which the warrant relates exist or are identifiable.

(10) References to a future or option do not include references to a contract whose terms provide—

(a) that, after setting off their obligations to each other under the contract, a cash payment is to be made by one party to the other in respect of the excess, if any, or

(b) that each party is liable to make to the other party a cash payment in respect of all that party’s obligations to the other under the contract,

and do not provide for the delivery of any property.

Nothing in this sub-paragraph has effect to exclude, from references to a future or option, references to a future or option whose underlying subject matter is currency.

[F4 (11) “Intangible fixed assets” has the same meaning as in Schedule 29 to this Act; and paragraphs 73 to 76 of that Schedule (and paragraph 72 of that Schedule so far as it relates to those paragraphs) have effect for the purposes of this Part as they have effect for the purposes of that Schedule.]

[F5 (11A) ”Loan-contract embedded derivative” means a contract to which a company is treated as party by virtue of section 94A(2)(b) of the Finance Act 1996.

(11B) ”Loan-contract host contract” means a loan relationship to which a company is treated as party by virtue of section 94A(2)(a) of the Finance Act 1996.

(11C) ”Original asset” means an asset representing an original creditor relationship.

(11D) ”Original creditor relationship” means a loan relationship to which—

(a) a company is creditor, and

(b) section 94A of the Finance Act 1996 applies.]

[F6 (12) “Share”, in relation to a company, means any share in the company under which an entitlement to receive distributions may arise; and any reference to a share includes a reference to each of the following—

(a) a depositary receipt for shares under which such an entitlement may arise;

(b) in the case of a company that has no share capital, any interests in the company possessed by members of the company;]

[F7 (13) “Designated”[F8 , except in paragraph 45G,] has the same meaning as for accounting purposes.

(14) A company has a hedging relationship between a relevant contract on the one hand (“the hedging instrument”) and an asset [F9 or a liability] on the other (“the hedged item”) if and to the extent that—

(a) the hedging instrument and the hedged item are designated by the company as a hedge; or

[F10 (b) in any other case—

(i) the hedging instrument is intended to act as a hedge of the exposure to changes in fair value of the hedged item that is attributable to a particular risk and could affect the profit or loss of the company, and

(ii) the hedged item is an asset or liability recognised for accountancy purposes or is an identified portion of such an asset or liability.]

[F11 For the purposes of this sub-paragraph the liabilities of a company include its own share capital.]

[F12 (15) “Insurance Prudential Sourcebook” means the Prudential Sourcebook for Insurers made by the Financial Services Authority under the Financial Services and Markets Act 2000.]

(16) “Long-term insurance fund” [F13 has] the meaning given in section 431(2) of the Taxes Act 1988.]

[F14 (17) “Depositary receipt”, in relation to shares (within the meaning of this Schedule) has the same meaning as it has in Part 4 of the Finance Act 1986 in relation to shares (within the meaning of that Part).]

Textual Amendments

F1 Sch. 26 para. 12(1) substituted (with effect in accordance with art. 1(2) of the amending S.I.) by The Finance Act 2002, Schedule 26, (Parts 2 and 9) (Amendment) Order 2006 (S.I. 2006/3269), arts. 1, 9(2)

F2 Words in Sch. 26 para. 12(1) inserted (with effect in accordance with art. 1(2) of the amending S.I.) by The Insurance Companies (Corporation Tax Acts) (Miscellaneous Amendments) Order 2006 (S.I. 2006/3270), arts. 1(1), 11(b)(i)

F3 Words in Sch. 26 para. 12(1) omitted (with effect in accordance with art. 1(2) of the amending S.I.) by virtue of The Insurance Companies (Corporation Tax Acts) (Miscellaneous Amendments) Order 2006 (S.I. 2006/3270), arts. 1(1), 11(b)(ii)

F4 Sch. 26 para. 12(11) substituted (with effect in accordance with art. 1(2) of the amending S.I.) by The Finance Act 2002, Schedule 26, Parts 2 and 9 (Amendment) Order 2004 (S.I. 2004/2201), arts. 1(1), 13(3)

F5 Sch. 26 para. 12(11A)-(11D) inserted (with effect in accordance with art. 1(2) of the amending S.I.) by The Finance Act 2002, Schedule 26, (Parts 2 and 9) (Amendment) Order 2006 (S.I. 2006/3269), arts. 1, 9(3)

F6 Sch. 26 para. 12(12) substituted (with effect in accordance with art. 1(4) of the amending S.I.) by The Finance Act 2002, Schedule 26, Parts 2 and 9 (Amendment No. 2) Order 2005 (S.I. 2005/2082), arts. 1(2), 8(3)

F7 Sch. 26 para. 12(13)-(16) added (with effect in accordance with art. 1(2) of the amending S.I.) by The Finance Act 2002, Schedule 26, Parts 2 and 9 (Amendment) Order 2005 (S.I. 2005/646), arts. 1(1), 9(3)

F8 Words in Sch. 26 para. 12(13) inserted (with effect in accordance with art. 1(2) of the amending S.I.) by The Finance Act 2002, Schedule 26, (Parts 2 and 9) (Amendment) Order 2006 (S.I. 2006/3269), arts. 1, 9(4)

F9 Words in Sch. 26 para. 12(14) inserted (with effect in accordance with art. 1 of the amending S.I.) by The Finance Act 2002, Schedule 26 (Parts 2 and 9) (Amendment No. 3) Order 2005 (S.I. 2005/3440), arts. 1, 6(3)(a)

F10 Sch. 26 para. 12(14)(b) substituted (with effect in accordance with art. 1(2) of the amending S.I.) by The Finance Act 2002, Schedule 26, (Parts 2 and 9) (Amendment) Order 2006 (S.I. 2006/3269), arts. 1, 9(5)

F11 Words in Sch. 26 para. 12(14) added (with effect in accordance with art. 1 of the amending S.I.) by The Finance Act 2002, Schedule 26 (Parts 2 and 9) (Amendment No. 3) Order 2005 (S.I. 2005/3440), arts. 1, 6(3)(c)

F12 Sch. 26 para. 12(15) substituted (with effect in accordance with art. 1(2) of the amending S.I.) by The Insurance Companies (Corporation Tax Acts) (Miscellaneous Amendments) Order 2006 (S.I. 2006/3270), arts. 1(1), 11(c)

F13 Word in Sch. 26 para. 12(16) substituted (with effect in accordance with art. 1(2) of the amending S.I.) by The Finance Act 2002, Schedule 26, (Parts 2 and 9) (Amendment) Order 2006 (S.I. 2006/3269), arts. 1, 9(6)

F14 Sch. 26 para. 12(17) inserted (with effect in accordance with art. 1(4) of the amending S.I.) by The Finance Act 2002, Schedule 26, Parts 2 and 9 (Amendment No. 2) Order 2005 (S.I. 2005/2082), arts. 1(2), 8(4)

Modifications etc. (not altering text)

C1 Sch. 26 para. 12(6)-(10) applied by 1992 c. 12, s. 275B(3) (as inserted (with effect in accordance with Sch. 4 para. 10(1) of the amending Act) by Finance (No. 2) Act 2005 (c. 22), Sch. 4 para. 5)

C2 Sch. 26 para. 12(14) applied by 1996 c. 8, Sch. 9 para. 12A(9) (as inserted (with effect in accordance with Sch. 7 para. 18(2) of the amending Act) by Finance (No. 2) Act 2005 (c. 22), Sch. 7 para. 18)