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HMRC internal manual

Lloyd's Manual

Syndicate accounts: taxation: transactions in foreign currencies: forex differences on early profit releases

Any profit or loss recorded by the syndicate reflecting an exchange rate movement between the date of release of US dollars and the close of syndicate year of account will be matched by an equal and opposite loss or profit on the balance owed by the member to the syndicate as a result of the early release. The net result for tax purposes is nil, and this needs to be reflected in the returns. No adjustment is needed in the member’s own tax return as the adjustment is reflected in the Lloyd’s taxation advice CTA1 (see LLM1170).

Where a syndicate makes an early release of profit in dollars, it will record a debtor (prepayment) in its accounts which will be revalued at the closure (or run-off entry) point under syndicate underwriting year accounting.

For example, a member receives an early profit release of $1,000 relating to business written for year of account 2006 in June 2008, before closure at the end of 2008. The exchange rate is then £1 = $1.9664. At 31 December 2008 the exchange rate is £1 = $1.4400. The syndicate underwriting year accounts will show:

$1,000 translated @ 1.9664 = £508.54
$1,000 translated @ 1.4400 = £694.44
Exchange gain (increase in prepayment asset value) = £185.90

HMRC guidance published annually by Lloyd’s as a Market Bulletin asks managing agents to make an adjustment to reverse (in this case) the gain as it is matched by an equal and opposite loss in the deferred income liability balance in the member’s accounts. In the above example, the managing agent would need to make an adjustment in the syndicate tax return reflecting a foreign exchange loss to net off against the equivalent gain reported in the syndicate accounts. This loss would be reported on Lloyd’s taxation advice CTA1.

It follows that the member would need to make no further adjustment on their return. Provided they follow the CTA1 adjustment, the gain will have been netted out. Corporate members will have reflected the loss in their accounts (over a period of years, in their annual accounts). To avoid adjusting twice, as an adjustment has been made via the CTA1, the member’s accounts loss will be added back. If the early release occurred before the final (third) year under syndicate underwriting accounting (LLM2040), for instance at the 18 month point, the corporate member will need to adjust for entries at both the 24 months and 36 month points in the related annual accounts. This approach avoids creating a timing mismatch between syndicate underwriting year and annual accounts reporting.

Separately, the member needs to consider whether an adjustment is needed for exchange differences on any dollar assets held. If dollars received on early profit release are sold before the accounting date, no further adjustment will be needed. But if the dollars are then held, an exchange difference may arise.

For individual members, any foreign exchange gain or loss would be potentially subject to capital gains tax on realisation, so any dollars still held at 31 December 2008 would not give rise to a gain at that date. Corporate members, on the other hand, would follow their accounts and in this case recognise the gain reflected there.