Resources undiminished

Losses from derivative contracts

The taxpayer was a wholly owned subsidiary of an approved investment trust company (C). In 2008 and 2009 the taxpayer acquired several put options and put spreads for commercial hedging reasons.

A proposal to novate the derivatives contracts from the taxpayer to C was considered but decided against because it would crystallise a tax charge in the taxpayer based on the value of the options. Instead its adviser Deloitte suggested the use of an arrangement already disclosed to HMRC under the disclosure of tax avoidance schemes regime. The taxpayer issued a new class of share capital to C with dividend rights that in effect transferred the economic benefit of the derivatives contracts. As a result the taxpayer had to apply pass-through accounting requiring it to write off the value of the options crystallising an equivalent tax...