Corporation Tax Act 2009 section 698A

Debits arising from derecognition of derivative contracts

Section 698A prevents companies from claiming tax deductions when a derivative contract is derecognised under accounting rules as part of a tax avoidance arrangement, where the company remains a party to the contract.

• Where a company enters into tax avoidance arrangements that cause a derivative contract (or part of one) to be derecognised under generally accepted accounting practice, any resulting debit cannot be brought into account for corporation tax purposes — provided the company remains a party to the contract after the derecognition event.
• The blocked debit cannot be claimed under any other corporation tax provision either; Part 7 retains priority over the amount, effectively locking out any alternative tax relief for the same item.
• A company is still treated as being a party to the derivative contract even if it has transferred its rights and liabilities under a repo or stock lending arrangement, or under a mortgage or charge transaction that is not treated as a disposal under capital gains rules.
• Tax avoidance arrangements are broadly defined as any arrangement, scheme or understanding — whether legally enforceable or not, and whether involving one or more transactions — where a main purpose of any party in entering into the arrangement is to obtain a tax advantage.