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HMRC internal manual

Corporate Finance Manual

Foreign exchange: matching: anti-avoidance: FA 2009: ‘one way exchange effect’: meaning of 'one way exchange effect'

Identifying a one-way exchange effect

CTA09/S328A (or CTA09/S606A for derivative contracts) sets out what is meant by a one-way exchange effect. Two conditions must be satisfied before an arrangement can be said to have this effect.

First, the arrangements must include an option, or a relevant contingent contract that behaves like an option. Guidance on the meaning of the terms in bold is at CFM63180. Thus the majority of net investment hedges - where, for example, a plain vanilla loan, a swap or a forward currency contract is used as the hedging instrument - will not need to be considered under the anti-avoidance rule because they do not involve options or option-like arrangements.

The second condition involves a comparison of two amounts, referred to as ‘amount A’ and ‘amount B’. Broadly, this comparison is between the exchange losses that would be brought into account for corporation tax if the currency concerned moved in one direction, and the exchange gain that would be taxed if the currency moved the other way by the same amount. The anti-avoidance rule will apply only if amount A is not equal to amount B.


A UK company holds shares in an Australian subsidiary. In order to protect itself against losses if the Australian dollar weakened, while still having the ability to benefit if the Australian dollar strengthens, the company buys a put option over the Australian dollar from an unconnected bank. For tax purposes, the option is fully matched to the shares. If the Australian dollar weakens, it will exercise the option, and an exchange gain arises on the option (counterbalancing the loss in value of the shares). Because of forex matching, however, this is not brought into account. Were the Australian dollar to appreciate by the same amount, the company would not exercise the option and no taxable exchange differences would arise. Amount A and amount B are therefore equal - both are nil. Thus company’s ability to match any forex gain on the option is not restricted by the anti-avoidance rule.

But even where amount A is not equal to amount B, the second condition has a further leg that must also be satisfied. The difference between amounts A and B must not be the same as if it would be if the matching rules were ignored. In other words, one-way exchange effect must depend, at least in part, on forex matching. Where option-based arrangements produce an asymmetric effect for tax, but this has nothing to do with matching, they are not caught. There is an example at CFM63210.

The legislation goes on to refine these basic concepts. It sets out how amounts A and B are to be calculated (CFM63150) and the time at which the comparison is to be carried out.