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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Foreign exchange: matching under SSAP 20: derivatives used for hedging and FA 2009

CTA09/S606(4C) and (4D)

FA09 introduced new provisions into CTA09/S606 to ensure that, where a derivative contract is used as a net investment hedge, the forex matching rules apply only to an exchange gain or loss computed by reference to spot rates of exchange.

This does not mean that a company using a forward currency contract as a hedge cannot match at all for tax purposes. But where the accounts bring in credits or debits computed on a ‘forward to spot’ basis (see the example at CFM62240), CTA09/S606(4D) makes it clear that the company must split this amount into two parts. These comprise an exchange gain or loss computed by reference to spot rates, and a residual amount which will consist wholly or mainly of a forward premium or forward discount. The first element can be matched: the second cannot.

The provision applies both to ‘SSAP 20 matching’ under CTA09/S606(3), and to cases where matching is achieved through regulations made under CTA09/S606(4) - in other words, the Disregard Regulations (see CFM62600).

It does not, however, change the definition of exchange gain or loss in CTA09/S705. This means that where CTA09/S606(4B) refers to exchange gains or losses arising from the translation of the profits or losses of part of a company’s business from one currency to another, the term takes its wider meaning. Thus the tax treatment of gains or losses thrown up by use of the closing rate/net investment remains unchanged. Similarly, there is no change to the meaning of ‘exchange gain or loss’ where the term is used elsewhere in CTA09/Part7, for example in CTA09/S690 (unallowable purposes).

The change applies to exchange gains and losses arising in accounting periods beginning on or after 22 April 2009. Where an accounting period straddles 22 April 2009, it is treated as if it were two separate accounting periods, with exchange differences arising in the period up 22 April and those arising subsequently being computed separately.