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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Foreign exchange: matching under the Disregard Regulations: conditions 1 and 2

Hedging conditions for regulation 3 to apply

Condition 1 - designated fair value hedge

Where the company has designated the liability as a hedge of foreign currency risk arising from the asset (or part of the asset), condition 1 will apply. This will happen where a fair value hedge of the shares by the liability has been formally designated. Such cases are likely to be less frequent than ‘condition 2’ cases.

Condition 2 - intended hedge

The second condition is that the currency in which the liability is expressed is such that, by entering into and continuing to be subject to the liability, the company intends to hedge the exchange rate risk from holding the asset, or part of the asset. Condition 2 will apply in the majority of cases, where the company cannot or does not want to designate a fair value hedge at single entity level, but there is an intention to hedge that is not reflected in the accounts.

In both cases, as with previous matching regimes, tax matching is available only where the asset and the matched liability are in the same company - see second example of CFM62650.

CFM57060 considers what is meant by ‘hedging intention’ in the context of the definition of a ‘hedging relationship’ in regulation 2(5). The requirement for there to be a ‘hedging relationship’ is one of the main conditions under each of regulations 7 to 9 of the Disregard Regulations (CFM57000). Regulations 3 and 4 do not use the phrase ‘hedging relationship’ within Condition 2; however the wording used denotes a similar concept. Consequently the general principles in the guidance on ‘hedging relationship’ also apply to the question of determining a company’s intention for the purpose of these regulations.

It is for a company to decide, in completing its self-assessment return, whether a particular liability is wholly or partly matched with an asset under condition 2 (there is unlikely to be any doubt as to whether condition 1 is satisfied). A company’s intention in borrowing in a particular currency, or continuing the borrowing in subsequent periods of account, is a question of fact. In most cases, it will be clear whether or not there is a hedging intention - see examples at CFM62650.

CFM62660 describes the tax consequences where either condition 1 or condition 2 is satisfied.