Loss caused by derecognition of derivative contracts

The taxpayer held put options and put spreads. It considered novating these contracts to its parent company C but decided not to because it would crystallise a tax charge.

Instead it made a bonus issue of A shares which carried dividend rights that in effect transferred the economic benefit of the 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 loss under FA 2002 Sch 26 para 15.

HMRC disallowed the loss and the First-tier Tribunal dismissed the taxpayer’s appeal.

The Upper Tribunal said the right approach in deciding whether there had been a loss was to focus on the net worth of the company as shown in its generally accepted accounting practice compliant accounts. The argument that there had been no diminution...