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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Foreign exchange: matching: anti-avoidance: FA 2009: ‘one way exchange effect’: meaning of tax advantage

Arrangements giving no, or a negligible, tax advantage

The main test for a one-way exchange effect - the effect potentially exists unless amount A is exactly equal to amount B - is an exacting one. It might be possible for the ‘not equal’ condition to be met purely because of some minor quirk of accounting, even though the arrangement in question was not intended to avoid tax.

It is also possible in theory (although improbable in practice) that arrangements operate asymmetrically so that a group ends up paying more tax on exchange differences than would otherwise be the case - for example, it actually brings an exchange gain into account, whereas on the counterfactual assumption no corresponding exchange loss would arise.

Thus as a further safeguard against non-abusive arrangements coming within the anti-avoidance rule, CTA09/S328(4A)(c) (and the derivative contracts equivalent) provide that the matching of exchange gains will only be ruled out if the arrangements give rise to a tax advantage that is more than negligible.

‘Tax advantage’ takes its meaning from ICTA88/S840ZA, a broad definition that includes both increasing allowable deductions or decreasing taxable profits. There is no requirement that the advantage should accrue in the accounting period being self-assessed.

The legislation does not spell out the comparator to be used in determining whether there is a tax advantage - this comes from case law, in particular the case of Commissioners of Inland Revenue v Parker (43TC396), where Lord Wilberforce said:

‘The paragraph, as I understand it, presupposes a situation in which an assessment to tax, or increased tax, either is made or may possibly be made, that the taxpayer is in a position to resist the assessment by saying that the way in which he received what it is sought to tax prevents him from being taxed on it; and that the Revenue is in a position to reply that if he had received what it is sought to tax in another way he would have had to bear tax. In other words, there must be a contrast as regards the “receipts” between the actual case where these accrue in a non-taxable way with a possible accruer in a taxable way, and unless this contrast exists, the existence of the advantage is not established.’

In many ‘one way bet’ avoidance schemes, the avoidance is bolted on to a commercial hedge of net investment in a foreign operation. The appropriate comparator may often be ‘plain vanilla’ arrangements that achieve the same hedging purpose.

Negligible tax advantage

HMRC will generally accept that a tax advantage is negligible if the decrease in taxable profits, or increase in losses, is or is likely to be less than £50,000 in any 12-month accounting period (or pro rata for a short accounting period). However, the relative as well as the absolute size of the tax advantage needs to be considered. If the transactions concerned involve very large amounts of money, a decrease in profits or an increase of losses of more than £50,000 may be ‘negligible’ in the context.