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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Foreign exchange: tax rules on exchange gains and losses: the FA 2002 changes

Assimilation of forex into loan relationships and derivative contracts

The FA 2002 changes brought the tax treatment of exchange gains and losses even closer to the accounting treatment. FA 2002 repealed the FA 1993 forex provisions with effect for accounting periods beginning on or after 1 October 2002. It also repealed FA96/SCH9/PARA4, which had previously ensured that exchange differences were not included in the computation of loan relationships credits and debits.

The new approach treated the exchange gain or loss in the same way as any other profit or loss from a loan relationship for tax purposes (CTA09/S328). Similarly, exchange differences arising on derivative contracts are treated in the same way as any other profit or loss on such contracts (CTA09/S606). Since the FA 1993 rules generally replicated the accounts treatment, the change in legislation had little practical effect in many cases. However, there are some specific differences:

  • There is no deferral of unrealised gains corresponding to that given by FA93/S139 - 143 (CTM86000).
  • The FA 1993 rules contained no special provisions relating to the transfer of debts or currency contracts within groups - such transfers were treated in the same way as any other disposal. However, intra-group transfers of loan relationships are governed by CTA09/S335, and intra-group transfers of derivative contracts by CTA09/S624. Exchange gains or losses may be accorded special treatment where these provisions apply.
  • The statutory provisions relating to loan relationships and derivative contracts held by partnerships (CTA09/S380 and CTA09/S619) apply to exchange differences in the same way as to any other gains or losses. SP4/98, which covered - among other things - the application of the forex legislation to partnerships, has no relevance to accounting periods beginning on or after 1 October 2002.
  • There were some changes to the scope of the legislation. The FA 1993 regime applied to ‘qualifying assets’, ‘qualifying liabilities’ and currency contracts. Convertible securities within FA96/S92, and asset-linked securities within FA96/S93, were not ‘qualifying assets’ for the holder, and any exchange gains or losses were swept up into the capital gains computation. And exchange differences arising on derivatives other than currency contracts (for example, a commodity future denominated in a foreign currency) were not within the regime. In both cases, FA 2002 brought such exchange gains and losses into an income regime.