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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Foreign exchange: matching: bringing amounts back into account: time at which gains or losses are recognised

Timing and definition of disposal

Before an amount can be brought back into charge, there must be a disposal (which includes a part disposal) of a matched asset. Amounts will be brought back into account if one or more of the following circumstances are present.

  • The disposal occurs in an accounting period beginning on or after 1 January 2005, and exchange gains or losses on a debtor loan relationship or arising from obligations under a currency contract have either been taken to reserves and offset against exchange differences on the asset, or have been disregarded under regulations 3 or 4 of the Disregard Regulations (SI 2004/3256).
  • In a period beginning on or after 1 October 2002 but before 1 January 2005, exchange differences on a liability or derivative contract have been taken to reserves and matched to exchange differences arising on the asset.
  • Exchange gains and losses on a matched loan or currency contract were, in a period beginning before 1 October 2002, left out of account under the Exchange Gains and Losses (Alternative Method of Calculation of Gain or Loss) Regulations 1994- see CFM86310.

Foreign business assets

However, exchange gains and losses taken to reserves may include exchange differences on foreign business assets. A foreign business asset is an asset belonging to a foreign branch of a company - the branch results may be incorporated into the company’s accounts by using the closing rate/net investment method, resulting in exchange differences being taken to reserves (CFM62060). A specific exclusion in regulation 4 ensures that disposal of a foreign business asset (other than shares not held on trading account) does not result in any amounts being brought back into account.

Example of share disposal triggering the bringing back into account of amounts

A UK company, which prepares accounts to 31 December, has owned shares in a US subsidiary for many years. On 1 February 2003, it borrowed in US dollars in order to hedge exchange risk arising from the investment, having never previously hedged the risk. Exchange differences on the loan were taken to reserves in the company’s accounts and ‘matched’ to exchange differences on the investment. On 30 September 2004, the company repaid the loan and did not subsequently hedge the net investment. On 30 June 2011 it sells the shares in the subsidiary.

The circumstance described in regulation 3(2) - the second bullet point above - is present, and the company must consider the application of the EGLBAGL Regulations when it computes any chargeable gain or loss on the share disposal, even though the investment was only hedged for a short period several years in the past. In practice, Substantial Shareholding Exemption will apply to many such disposals (see CFM62290, example 2); but the company nevertheless needs to keep sufficient records to ensure that, if a gain or loss is brought into charge, the appropriate adjustments under the EGLBAGL Regulations can be made.

Application of TCGA 1992 definitions

Disposal is defined in regulation 2 (2)(a), SI2002/1970 as any event that is treated as a disposal by TCGA 1992. It includes part disposals. For example, if a company claims that shares in a subsidiary have become of negligible value, and a deemed disposal and reacquisition takes place under TCGA92/S24(2), the application of the EGLBAGL Regulations will be triggered. The Regulations make separate provision for no gain/no loss disposals, however - see CFM62320.

The timing of a disposal is also governed by the rules in TCGA 1992 (see CG14250).

Disposals of loan assets

A company may invest in a foreign entity through a long-term loan which is intended to fulfil an equity function. Exchange gains or losses on such a long-term loan may be taken to reserves, and matched to losses or gains on a liability or currency derivative. Repayment of such a loan, in whole or part, represents a disposal of an asset, and will trigger the application of the EGLBAGL Regulations.