CFM9220 - Taxing forex: basic rules: summary

When do exchange differences matter?

The following summarises the instances in which exchange differences arising on money debts or derivative contracts are treated differently from other credits or debits.

• Exchange differences on loan relationships or derivative contracts that are taken to reserves are disregarded (FA96/S84A(3) and FA02/SCH26/PARA16(3) – CFM9210).
• Where a loan relationship is between connected parties, the disallowance of bad debt relief or impairment losses does not extend to associated exchange differences – CFM9215.
• Parts of FA96/S100, dealing with money debts that are not loan relationships, relate specifically to exchange differences – CFM9205.
• For periods of account beginning before 1 January 2005, only interest and exchange differences arising on creditor loan relationships within FA96/S92 (convertible or exchangeable securities) or asset-linked securities within FA96/S93 come within the loan relationships regime – CFM6150 and CFM5920.
• FA96/SCH9/PARA11 (loan relationships on non arm’s length terms) does not apply to exchange gains and losses, as is also the case for the transfer pricing provisions of ICTA88/SCH28AA. Instead, FA96/SCH9/PARA11A makes separate provision for exchange differences on certain non arm’s length loan relationships – CFM9805.
• For periods beginning before 1 January 2005, the provisions at FA96/SCH9/PARA12 and FA02/SCH26/PARA28 disregarded credits or debits from an intra-group transfer of a loan relationship or derivative contract, but this did not apply to exchange gains or losses – CFM5804.
• The unallowable purposes rules for loan relationships (FA96/SCH9/PARA13) and derivative contracts (FA02/SCH26/PARA24) make special provision for exchange credits and debits – CFM6210.

Under the Disregard Regulations, exchange gains or losses on liabilities or derivative contracts that are matched with shares (or ships or aircraft) are disregarded – CFM9400 onwards.