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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: order of matching: regulation 5

Priority rules for matching

Where a company holds more than one eligible asset (shares, ships or aircraft) denominated in a foreign currency, it is necessary - when the asset is disposed of - to decide how much of the exchange differences on liabilities and derivative contracts “belong with” that asset, and therefore fall to be brought into account on the disposal.

For relevant exchange differences arise in a period beginning before 1 January 2005, regulation 7 of the Bringing into Account of Gains and Losses Regulations sets out a statutory order of matching (CFM62370). For later periods, such a statutory rule is arguably not needed, because matching is based on a company’s intentions - exchange gains or losses on a particular liability or derivative contract ‘belong with’ the asset which that liability or derivative was intended to hedge. However, for the avoidance of doubt, regulation 5 of the Disregard Regulations sets out the order of tax matching of loan relationship liabilities and derivative contracts to those assets.

The contracts and liabilities in question are those whose currency of obligation or denomination could be said to be an economic hedge of the currency risk on the assets.

Liabilities and derivative contracts are deemed to match eligible assets in the following order:

  1. Firstly to the greatest possible extent with ships and aircraft.
  2. Secondly any unmatched balance to the greatest possible extent with assets whose disposal would result in a chargeable gain (if the disposal were made at least 12 months after the acquisition of the asset).

Thirdly any unmatched balance against assets covered by the Substantial Shareholding Exemption in Para 1 Schedule 7AC TCGA 1992 (see CG53000).

The relevant value the liability/contract as set out in regulation 4A (see CFM62730) will determine the extent to which the liability/contract is matched to each category of asset.