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HMRC internal manual

Lloyd's Manual

Syndicate accounts: taxation: transactions in foreign currencies: forex differences on excess US dollar cash calls

Excess cash calls in this context mean amounts paid by members to managing agents which have not been applied against specific debts by the syndicate closing date. The syndicate will record a deferred income liability to the member at that date, and an exchange difference will arise if the cash call was in US dollars. Any exchange difference on the liability will, however, be matched by an equal and opposite movement on the corresponding prepayment asset recorded by the member. This results in a net nil result for tax purposes, which must be reflected in the tax treatment. This is achieved by making an adjustment to the member’s tax return and, to facilitate this, the necessary adjustment is reflected in the Lloyd’s taxation advice CTA2 (see LLM1170).

Both the liability and the dollars will be revalued at the 36 month point under syndicate underwriting year accounting (LLM2040), when the syndicate closes or enters run-off. For example, a managing agent receives an excess cash call from a member of $5,000 in March 2008, when the exchange rate was £1 = $2.0020 for underwriting year of account 2006. At 31 December 2008, when the account closed, the exchange rate was £1 = $1.4400. The syndicate accounts for 2006 will show a foreign exchange loss of £974.72:

$5,000 translated @ 2.0020 = £2,497.50
$5,000 translated @ 1.4400 = £3,472.22
Exchange (loss) = (£974.72)

The member will not recognise the loss for tax purposes as it is matched as explained above. The adjustment is not made in the syndicate figures via the CTA1. Rather, a gain of £974.72 is reported as a member figure on CTA2 and this must be included in the member’s tax return to achieve the net zero. This approach should be followed by corporate members also, as otherwise a timing mismatch may arise between the recognition of syndicate loss in the underwriting year accounts and member gain on annual accounting. To get the right result, a corporate member would also need to deduct the gain shown in their own accounts.

The amount shown on Lloyd’s taxation advice CTA2 will be comprised in the foreign exchange adjustments on cash calls generally, and will not be distinguished as an excess cash call item. But if the above guidance is followed, the correct overall result will follow.

The £974.72 forex gain on the dollar asset held will be recorded in the syndicate accounts and is recognised for tax purposes through reflection in the Lloyd’s taxation advice CTA1.