Derivative contracts and hedging

Produced by a Tolley Corporation Tax expert

Corporation Tax

Guidance

This guidance note provides assistance with the rules governing the taxation of derivative contracts that are used to hedge monetary assets and liabilities and net investments in overseas operations. See the Derivative contracts guidance note for more general information on the taxation of derivative contracts.

See Simon’s Taxes D1.852 onwards for a more detailed discussion of derivative contracts and hedging.

Hedging interest expense

New UK GAAP and IFRS

Under new UK GAAP and IFRS, derivative contracts must be shown on the balance sheet at their fair value and changes in the market value reflected in the income statement, unless hedge accounting is adopted.

Market value movements in interest rate hedges reflect changes in market interest rates and counter-party risk. The former risk in particular can fluctuate considerably. Although the fluctuations typically reverse over the life of a contract, such movements can cause volatility in the annual financing expense. Hedge accounting is designed to reduce this volatility.

See Example 1.

Hedge

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