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HMRC internal manual

Corporate Finance Manual

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Foreign exchange: matching: anti-avoidance: ‘one-way bet’ schemes: overview

Avoidance using dual currency loans and options

Foreign exchange movements are an integral part of the loan relationships and derivative contracts rules, so in many cases anti-avoidance rules - in particular the ‘unallowable purposes’ rules - will apply to forex movements as they do to any other kind of debit or credit. Two provisions, however, are specific to forex.

The first of these concerns transactions which can be said to take place not at arm’s length. There is more on this at CFM38510 - CFM38590.

The second concerns so-called ‘one-way bet’ schemes. The common factor of such schemes is that if the exchange rate for a particular currency moves in one direction a foreign exchange loss is claimed, whereas if the rate moves in the other direction there is no corresponding gain. The schemes involve intra-group loans or derivatives, which are eliminated on consolidation, so there is no effect on the group’s overall financial results.

There is an example of a ‘one-way bet’ scheme, using a dual currency loan, at CFM63020.

Regulations were introduced in 2006 (The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) Regulations 2006 - SI 2006/843) to counter particular schemes of this sort. These came into force on 22 March 2006, and are described at CFM63030.

These regulations were revoked by FA 2009, and replaced by new targeted anti-avoidance rules (‘TAAR’) in CTA09/S328A (for loan relationships) and CTA09/S606A (for derivative contracts), which prevent exchange gains from being matched where a ‘one-way exchange effect’ is present. Guidance on these provisions is at CFM63100 onwards. The new rules apply from 22 April 2009, and the 2006 Regulations cease to have effect on the same date.

For periods or part-periods to which the 2006 Regulations apply, Regulation 4 (CFM63030) deals with schemes involving dual currency loans, and Regulation 5 (CFM63040) with option schemes.