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HMRC internal manual

Corporate Finance Manual

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Foreign exchange: matching under SSAP 20: overview

Matching under SSAP 20

The tax treatment of foreign exchange transactions has undergone a number of changes in recent years and CFM62220 contains an overview of these.

Guidance on the current legislation is as follows:

  • For companies continuing to account under SSAP 20 using net investment hedging, CTA09/S328(3) provides for exchange gains or losses on loan relationships, which are taken to reserves, to be disregarded - see CFM62230. There is similar provision for derivative contracts at CTA09/S606(3).
  • The rules for bringing exchange gains or losses back into account when there is a disposal of the ‘matched’ asset are to be found in SI 2002/1970 - the Exchange Gains and Losses (Bringing Back into Account Gains or Losses) Regulations 2002. Guidance is at CFM62260 onwards. These rules apply both to matching under both primary and secondary legislation.
  • Where companies have adopted International Financial Reporting Standards (IFRS), or the new UK standards modelled on IFRS, they can no longer use the ‘offset method’ at individual company level to hedge net investment in a foreign operation. This means that CTA09/S328(3) and CTA09/S606(3) cannot apply. Instead, regulations made under powers in S328(4) and S606(4) allow ‘forex matching’ to continue for tax puposes. There is more about this at CFM62600 onwards.
  • Transitional provisions arise in respect of the change in tax treatment in 2002 (see CFM86320).
  • The matching provisions have given rise to various anti-avoidance devices. Two sets of rules deal with these, those in relation to periods before 22 April 2009 and those after. See CFM63000 for more details. The effect of these rules is to prevent exchange gains (but not losses) from being matched where there is a ‘one-way exchange effect’. Details are at CFM63020 onwards. A further change to S606 was introduced by FA09 to ensure that, for derivative contracts only, the matched gain or loss must be computed by reference to spot rates - CFM62250.