INTM414440 - Financial transactions: Treatment of exchange gains and losses

What has been amended or been added in broad terms 

The introduction of TIOPA10/S173A protects exchange gains and losses arising on ‘qualifying financial instruments’ from adjustments under TIOPA10/Part 4. Broadly, the rule applies where the instrument is matched with another financial instrument for the purpose of eliminating or reducing exchange rate risk.  

In addition, the rule sets out that any exchange movements arising on qualifying financial instruments are to be ignored in determining whether there is a potential UK tax advantage under TIOPA10/S155.   

Detailed explanation of how the provision operates 

The new rule expands on the approach taken by the previous rules in CTA09/S447 (for loan relationships) and CTA09/S694 (for derivative contracts) which provided similar protection, but in a narrower range of circumstances. The intent of the new rule is that exchange gains and losses on qualifying financial instruments cannot be subject to a transfer pricing adjustment.  

A qualifying financial instrument is defined as one which falls into any of the following categories: 

  • It is matched with another financial instrument of the company.  

  • It is matched with a financial instrument of a different company, and the intention of the two companies is that exchange movements of one will offset exchange movements of the other.  

  • It is a financial instrument on which exchange gains or losses arising would fall to be disregarded under regulation 3, 4, 5, 5A or 5ZA of the Disregard Regulations. 

  • It is a financial instrument that gives rise to fair value profits or losses that would fall to be disregarded under regulation 7 of the Disregard Regulations.  

  • It is a financial instrument that is wholly denominated in the same reference currency that the company uses in respect of the actual provision to which the instrument relates.  

A financial instrument is defined as either a loan relationship or derivative contract for the purposes of this rule. That definition includes instruments deemed to be loan relationships (e.g. relevant non-lending relationships, sale and repurchase agreements, and structured finance arrangements). 

‘Matched’ 

A financial instrument of a company is ‘matched’ with another financial instrument to the extent that one is intended to act to eliminate or substantially reduce the currency risk of the other.  Documentation to support the purpose of such matching instruments will be useful in considerations of intention. 

‘Currency tax offset arrangement’ 

A currency tax offset arrangement covers certain arrangements where the company’s exchange exposure for tax purposes on a financial instrument is offset by an exposure for tax purposes on a financial instrument in a different company. The two companies must intend that exchange movements on one offset exchange movements of the other. This would be most likely to arise in situations involving two companies under common ownership. Again, documentation will be useful in evidencing such intention.  

‘Denominated in the reference currency of the company’ 

If the financial instrument is wholly denominated in the same reference currency used by the company in respect of the actual provision to which the instrument relates, then TIOPA10/Part 4 delineating the instrument in another currency under the arm’s length provision will not create exchange gains and losses where they would not exist absent the transfer pricing provisions. 

Consequential changes  

As a result of the introduction of this new section, various amendments have been made to CTA 2009. In particular, CTA09/S447, S449 to S451 and S694 have been repealed. 

The previous guidance on the treatment of exchange gains and losses under CTA09/S447 can be found at CFM38520.  

Commencement provisions 

The general commencement provision is that these rule changes take effect for chargeable periods beginning on or after 1 January 2026.  

For the purposes of applying this rule to the changes relating to foreign exchange gains and losses, any periods beginning before and ending on or after 1 January 2026 are to be split into two separate accounting periods: one including so much of the periods as falls before that date, and one including so much of the periods as falls on or after that date.