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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Foreign exchange: matching: anti-avoidance: FA 2009: ‘one way exchange effect’: summary of the legislation

Arrangements with a one-way exchange effect

CTA09/S328(4A) provides that an exchange gain arising from an loan relationship asset or liability of a company is not disregarded because of the forex matching rules if two conditions are met.

  • The loan relationship must be part of arrangements (CFM63130) having a one-way exchange effect in the accounting period, and
  • The arrangements cause the company to gain a tax advantage that is more than negligible.

There is similar provision for derivative contracts at CTA09/S606(4E). There is no restriction on the matching of exchange losses.

In deciding whether or not the anti-avoidance rule applies, it is necessary to start from the perspective of a company having an exchange gain that it wants to match. The tests apply anew in each accounting period. So if an arrangement does not, in the period in question, give rise to an exchange gain that might potentially be matched, it will not be within the scope of the anti-avoidance rule - even if it has been caught in a previous accounting period, or might be caught in a future period.

The anti-avoidance rule applies both where matching takes place under primary legislation and where it takes place under the Disregard Regulations. Since CTA09/S328(4A) applies to loan relationship assets as well as liabilities, it is also capable of applying where

  • exchange gains on a ‘permanent as equity’ loan are taken to reserves and potentially disregarded because of CTA09/S328(3), or
  • a company uses a creditor loan relationship as a hedge of foreign exchange risk on its own share capital.

CFM63130 to CFM63190 explains the conditions for the rule to operate, and CFM63200 to CFM63210 gives some examples.