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HMRC internal manual

Corporate Finance Manual

Loan relationships: tax avoidance: forex: overview


There are two main types of avoidance involving forex which are addressed in the legislation.

Transactions not at arm’s length

The first forex anti-avoidance rule concerns transactions which can be said to take place not at arm’s length. The general loan relationships rule in CTA09/S444 (CFM38400) which counters non-arm’s length transactions does not apply to exchange gains and losses. Separate provisions in the FA 1993 Forex legislation dealt with this issue, and when FA 2002 repealed the FA 1993 forex provisions a new rule was introduced at FA96/SCH9/PARA11A, to cover exchange differences on transactions not at arm’s-length. This legislation is now at CTA09/S447. It disregards both exchange losses and exchange gains, either wholly or partially, in the prescribed circumstances. These are described at CFM38520 to CFM39590.

‘One-way bets’

The second forex anti-avoidance rule concerns so-called ‘one-way bet’ schemes. The common factor of such schemes is that if the exchange rate for a particular currency moves in one direction a foreign exchange loss is claimed, whereas if the rate moves in the other direction there is no corresponding gain. The schemes involve intra-group loans or derivatives, which are eliminated on consolidation, so there is no effect on the group’s overall financial results.

These schemes seek to exploit the tax rules on foreign exchange ‘matching’, which is described at CFM62000. Anti-avoidance rules relating to this are covered at CFM63000.

Other avoidance rules relating to forex avoidance: unallowable purposes

FA 2002 assimilated exchange gains and losses into the loan relationships regime and extended the unallowable purposes rule at CTA09/S441 (then at FA96/SCH9/PARA13 - CFM38100) to exchange gains and losses on loan relationships, where these have been entered into for an unallowable purpose. Circular, loss multiplying or otherwise abusive transactions that manipulate exchange gains and losses for avoidance purposes are more likely to come within the unallowable purposes rule.

Both exchange gains and losses are disallowed because a company lending or borrowing foreign currency for an unallowable purpose (for example, as part of a tax avoidance scheme) is likely to have a genuine exposure to both exchange gains and losses. It would therefore be inequitable to tax gains while disallowing losses.