Corporation Tax Act 2009 section 700

Relationship of this Part to Part 5: loan relationships

Section 700 explains how to resolve potential overlaps between the derivative contracts rules (Part 7) and the loan relationships rules (Part 5) when a derivative contract gives rise to a loan relationship.

• Where a derivative contract creates a loan relationship and the resulting profit or loss is already accounted for under the loan relationships rules (Part 5), the derivative contracts rules (Part 7) generally do not also apply to that same profit or loss
• This prevents double counting by giving priority to the loan relationships rules over the derivative contracts rules in most overlap situations
• A typical example is where one party defaults on a payment under an interest rate swap, creating a debt owed to the other party — that debt is taxed under the loan relationships rules, not the derivative contracts rules
• There is an important exception for embedded derivatives: where a loan relationship contains an embedded derivative that is separated out under section 585, the profits and losses attributable to that embedded derivative element are dealt with under the derivative contracts rules (Part 7), not the loan relationships rules (Part 5)