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HMRC internal manual

Corporate Finance Manual

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Foreign exchange: matching: anti-avoidance: FA 2009: ‘one way exchange effect’: meaning of ‘amounts A and B’

Calculating amount A and amount B

Amount A

In broad terms, this is the aggregate exchange losses that arise to the company doing the forex matching (‘company A’), and companies connected with it, as a result of the arrangement. It is defined as the sum of ‘relevant exchange losses’ arising to company A, and companies connected with it, less the sum of the ‘relevant exchange gains’ of those companies. It may be a negative number (i.e. exchange gains exceed exchange losses), or nil.

In order to be ‘relevant’, an exchange gain or loss must arise on a loan relationship or a relevant contract to which the company is a party, and which forms part of the arrangements. ‘Relevant contract’ takes its meaning from Part 7 of CTA09 - a future, option or contract for differences. There is, however, no requirement for this to be a derivative contract, so it includes any derivative embedded in some other type of contract (which is treated as a relevant contract by virtue of S584, S585 or S586), or an instrument that is not accounted for as a derivative.

Furthermore, the exchange gain or loss must be brought into account for corporation tax purposes. But in assessing this, the effect of the anti-avoidance rule itself is disregarded, as is any effect of the ‘unallowable purposes’ rules (CTA09/S441 and S442, and CTA09/S690 to S692).

Two companies are connected if they are connected for loan relationships purposes. The exemptions from connection in CTA09/S466(3) (companies controlled by the Crown etc) and CTA09/S468 (CFM35110) apply.

Amount B

Amount B - again, in broad terms - is the aggregate exchange gain that would have arisen if the currency had moved the other way to the same extent. More precisely, it is the sums of the relevant exchange gains of company A and companies connected with it, less the sum of the relevant exchange losses of those companies, computed on the counterfactual currency assumption (see CFM63160). As with amount A, it can be negative or nil.

Test days

Since exchange gains or losses must arise over a particular period, a comparison of amount A and amount B must be carried out on a defined day, referred to in the legislation as a ‘test day’. Unless the test day is the last day of an accounting period, the period between the start of a company’s accounting period and the test day is treated as if it were a separate accounting period, with exchange gains or losses being computed for that period.

Example

An arrangement involves three connected companies, A, B and C. A and B prepare accounts to 31 December, while C prepares accounts to 31 March. 2 October 2010 is a test day with respect to that arrangement. In computing amounts A and B, the taxpayer company (company A) must take into account relevant exchange gains or relevant exchange losses arising to itself and to company B in the period 1 January to 2 October 2010, and to company C in the period 1 April to 2 October 2010. Amount A and amount B will always both be computed over the same period or periods.

CTA09/S328C (or CTA09/S606C for derivative contracts) defines ‘test day’. It is any day on which - again, putting it broadly - financial outcomes for a company will, or might, diverge. Thus where an arrangement includes one or more options, it is the day on which the option is exercised or (if it is not exercised in the period) any day on which it might have been exercised; or the day on which there is a disposal (by company A, or a company connected with it) of an option, or a variation. Similarly, where arrangements include one or more relevant contingent contracts (CFM63180), a day on which an operative condition of the contract is met will be a test day, as will a day on which a disposal or variation occurs.

As a long-stop, the last day of an accounting period will always be a test day, in order to bring in arrangements where, for example, an option is not exercisable at any time in the period but exchange gains or losses may nevertheless arise as a result of fair value movements.

In many, if not most, cases there will be more than one test day during an accounting period. In practice, however, it will usually only be necessary to look at one or two test days. It is only necessary for a one-way exchange effect to arise on one of these days for the anti-avoidance rule to apply. And, where an arrangement is not caught on the day or days selected, it will often be possible to infer that it would not be caught on any possible test day.