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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Foreign exchange: matching under Disregard Regulations: matching own share capital

Matching a company’s own share capital

In certain restricted circumstances, companies may hedge foreign currency risk arising from their own foreign currency denominated share capital. In some cases, companies using SSAP 20 will take exchange differences on a loan relationship asset or a derivative asset, which is matched with the company’s share capital, to reserves. Where this is the case s.84A(3) FA 1996 (for loan relationships), and paragraph 16(3) Schedule 26 FA 2002 (for derivatives) will disregard the exchanges gains or losses on these instruments.

Where a company had adopted this accounting treatment in a period beginning before 1 January 2005, regulation 3(5)-(6) (for loan relationships) and regulation 4(4A)-(4B) (for derivatives) permits it to be followed for tax purposes in later periods - exchange gains or losses on the matched asset or derivative are disregarded.

If the particular circumstances of regulation 3(6)(a) and (b), or regulation 4(4B)(a) and (b) are met - in other words, the company matched its own share capital under SSAP 20 in an ‘old’ accounting period - it should continue matching on the same basis, and to the same extent, as was previously the case under SSAP 20.

But, while these provisions specify that matching applies “in particular” in this situation, they go wider than this. This is to cater, for example, for companies newly incorporated after 31 December 2004, or to companies that first began to hedge their share capital in periods beginning after 1 January 2005.

The regulations do not define explicitly the more general situations in which a company’s own share capital is to be regarded as matched. In practice, you should apply condition 2, with appropriate modifications - reading “loan relationship asset” for “liability” in regulation 3, for example. The company must intend, in acquiring or continuing to be party to the asset or derivative, to eliminate or reduce the exchange rate risk arising from the share capital. Therefore the regulations will apply to analogous situations to those where SSAP20, if it applied, would have taken exchange differences on the instrument hedging own share capital to reserves.

The company must thus be able to identify an exposure to exchange rate movements that impacts on the profit or loss of the company. This is most likely to be the case where the share capital in question is accounted for as a financial liability - for example, preference shares - and exchange differences are recognised in the profit and loss account or income statement, although there may be other cases where the condition is satisfied. HMRC staff should consult CT&VAT (Financial Products) in cases of difficulty, after seeking advice from their local compliance accountant.

‘Share capital’ in the Disregard Regulations does not include debt instruments, even if these are classified as equity for accounting purposes (for example, perpetual debt). The loan relationships rules will apply to profits and losses on such instruments, including exchange gains and losses.