Corporation Tax Act 2009 section 616

Disapplication of fair value accounting

Section 616 prevents the use of fair value accounting and the splitting of certain contracts containing embedded derivatives, where the resulting tax volatility would be unacceptable, and instead requires the original unsplit contract to be taxed on an alternative accounting basis.

• Where a contract contains an embedded derivative that is treated as a separate derivative contract for accounting purposes, this section can reverse that splitting so the original contract is treated as a single instrument for tax purposes.
• Fair value accounting is disapplied for the original contract, meaning profits and losses must be calculated on an alternative basis — this prevents unacceptable volatility in taxable results that fair value movements might otherwise cause.
• The section does not apply if the embedded derivative qualifies under the excluded property rules, if the Disregard Regulations for interest rate contracts apply, or if the company has elected under section 617 to retain fair value accounting treatment.
• Where the original contract is not itself a derivative (i.e. it falls outside Part 7), it drops out of the derivative contracts regime entirely and is instead taxed according to its underlying nature, with generally accepted accounting practice applied as though fair value accounting were not available for that company.