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HMRC internal manual

Corporate Finance Manual

FA2010: risk transfer schemes: calculating the ring-fenced losses

Ring-fenced Scheme Losses

Where a company has made scheme losses (CFM63360) as part of a risk transfer scheme, a proportion of those losses will be ring-fenced. The reason why only a proportion of the ‘scheme loss’ is ring-fenced is to ensure that the relevant group obtains tax relief for the element of the loss that relates to a real economic loss to the group, when viewed as a whole. This would generally be that part of the loss that represents the ‘overhedge’ - i.e. the excess over which a normal hedge would have been obtained.

The rules for calculating the amount of loss to ring-fence are at CTA10/S937F and are calculated using the following formula:

A - B - C

A = The total of the scheme losses made in the period in relation to the scheme by the members of the relevant group

B = The total of the scheme profits made in the period in relation to the scheme by the members of the relevant group

C= The pre-tax economic loss from the scheme

Pre-tax economic loss

The ‘pre-tax economic loss’ is the overall economic loss that the group makes, as a whole, by virtue of being party to the scheme, and prior to any tax implications.


Using the example at CFM63320, and assuming that sterling has depreciated by 10% against yen, we can see how this works:

A = The loss on the yen borrowing (see CFM63360) = £13.9m

B = £0 (there are no profits made on any loan relationship or derivative contract)

C = The overall pre-tax loss made from the scheme - i.e. the loss on the yen borrowing of £13.9m less the profit made on the shareholding of £10m = £3.9m

So, the relevant proportion of the ‘scheme loss’ that is a ‘ring-fenced scheme loss’ is (£13.9m - £0 - £3.9m) / £13.9m = 71.2%.

As the ‘scheme loss’ was £13.9m, the ‘ring-fenced scheme loss’ is 72% of £13.9m = £10m