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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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FA2010: risk transfer schemes: meaning of ‘risk transfer scheme’: condition 1

The definition of a ‘risk transfer scheme’ is at CTA10/S937C and this states that in order for a scheme to be a ‘risk transfer scheme’ it must meet three conditions (Conditions 2 and 3 are covered at CFM63350):

Condition 1

Condition 1 is an initial purpose test. This is that the main purpose, or one of the main purposes, of any member of a group entering into the scheme is to obtain a ‘financial advantage’ for the group. Additionally, it must be reasonable to assume that the ‘financial advantage’ could not have been obtained without the group becoming subject to (or incurring the cost of avoiding) a ‘relevant risk’.

‘Financial advantage’ is defined at CTA10/937C(6). This is that, combining the impact of the scheme on each member of the group, the effect of the scheme is to increase returns on an investment or to reduce the costs of borrowing. Any result that is economically similar to either of those impacts would also be caught.

‘Relevant risk’ is defined at CTA10/937C(3). This is that, due to fluctuations in any sort of price or value (which would include rates of currency exchange between two currencies and the retail price index ‘RPI’) the group is subject to the risk of making an economic loss.

So, in essence, Condition 1 is met where a group enters into a scheme that allows the group to economically benefit from being subject to a risk that arises from variations in some sort of index, and that the benefit could not be obtained without exposure to that risk.

Looking at the example in CFM63320 Condition 1 would be met as follows:

  • The financial advantage is to decrease the costs of borrowing (i.e. the lower interest rates payable on yen denominated borrowing); and
  • Access to the lower interest rate could only be obtained by also becoming subject to the foreign exchange risk inherent in borrowing in yen; and
  • Due to being subject to the foreign currency exchange fluctuation, the group is subject to the risk of making a loss; and
  • The purpose of the scheme is to benefit from that financial advantage.


Condition 1 is not met where there is no purpose (or not a main purpose) of obtaining the financial advantage. As this is a factual test, each case must be assessed on its own merits. However, HMRC are aware that some groups may have entered into overhedging schemes relating to foreign exchange exposures on the basis that this is the only reasonable method by which a necessary foreign exchange exposure could be hedged on a post-tax basis. To the extent that there is no reasonable method by which a group can obtain an effective post-tax hedge of a particular foreign exchange exposure, HMRC will generally accept that there is no purpose of obtaining a financial advantage if overhedging arrangements are entered into. Accordingly, Condition 1 will then be failed and the risk transfer scheme provisions will not apply.

HMRC recommend that a non-statutory business clearance application is made whenever a group considers that this applies to them. Please ensure that all such applications are passed to the CT&VAT Financial Products team.