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HMRC internal manual

Corporate Finance Manual

Foreign exchange: matching: bringing amounts back into account: introduction

Overview of ‘bringing into account’ provisions

The purpose of having special rules for forex matching is to ensure that exchange gains or losses on loans or derivatives, which hedge foreign exchange risk arising from investment in a foreign operation, are brought into account at a time and in a manner consistent with the tax treatment of the hedged asset (see CFM62010).

In broad terms, this means that exchange gain or losses arising on the hedging instrument are initially disregarded, but are brought back into account when there is a disposal of the asset (other than a no gain/no loss disposal).

  • If the asset consists of shares, so that exchange rate movements will be reflected in the overall chargeable gain or allowable loss accruing on the share disposal, the ‘matched’ gains or losses on the hedging instruments will also be brought back into account as a chargeable gain or allowable loss.
  • If the asset consists of a loan relationship, or a ship or aircraft - so that profits or losses on disposal are likely to be taxed as income - exchange gains or losses on the hedging instruments are also brought back into account as income.
  • If disposal of the matched asset does not give rise to a tax charge, because Substantial Shareholding Exemption applies to a disposal of shares, gains or losses on matched loans or derivatives are never brought back into account.

Although the broad principles have not changed since the concept of forex matching was introduced as part of the FA 1993 forex regime, there have been a number of changes to the legislation implementing the principles.

The ‘bringing back into account’ rules are in secondary legislation - The Exchange Gains and Losses (Bringing into Account Gains or Losses) Regulations 2002 (SI 2002/1970). The title is frequently abbreviated to the ‘EGLBAGL Regulations’.

These regulations apply to accounting periods beginning on or after 1 October 2002. However, it is quite possible that a disposal of shares made after that date will trigger the bringing back into account of gains or losses on currency contracts or loans that were matched under the ‘old’ rules contained in the Exchange Gains and Losses (Alternative Method of Calculation of Gain or Loss) Regulations 1994 (SI 1994/3227). Guidance on the transitional rules relating to bringing such amounts back into account is at CFM86310 onwards.

A significant change to the EGLBAGL Regulations was made by SI 2010/809, and applies to disposals of assets made on or after 6 April 2010. For disposals of shares before that date, exchange gains or losses on hedging instruments are brought back into account as ‘free-standing’ chargeable gains or allowable losses. After that date, the relevant amounts are brought back into account by adjusting the disposal consideration for the shares in the capital gains computation.

The guidance which follows applies to disposals both before and after 6 April 2010, except where otherwise indicated.

The rules for bringing amounts back into account are the same regardless of whether the assets have been matched under SSAP 20 (see CFM62200 onwards) or under the Disregard Regulations (see CFM62600 onwards).

Regulation 13 of SI 2002/1970 provides a separate rule for bringing into account exchange gains or losses on a loan relationship asset where these have been taken to reserves. Guidance on this is at CFM62470.