Accounting loss arising from the recognition of a derivatives contract

The taxpayer held put options and put spreads. It considered novating these contracts to its parent company 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. The First-tier and Upper Tribunals dismissed the taxpayer’s appeal.

The key issues for the Court of Appeal were whether for the purposes of para 15 the accounting loss resulting from the derecognition constituted a loss and if so did it ‘arise from’ the derivative contracts and did the relevant debit ‘fairly represent’ a loss arising...