CFM9330 - Taxing forex: SSAP 20 matching: development of tax rules

History of matching - Marine Midland

Before FA 1993, exchange gains and losses on both shares and long-term loans were ignored for tax purposes until disposal. On disposal any exchange gains and losses on the shares would be taken into account in the CG computation. The loan would have been a 'nothing' and any exchange gains and losses arising on it would never have been recognised for tax purposes.

The case of Pattison v Marine Midland Ltd (57TC219) led to a major change in the tax treatment of matched foreign exchange gains and losses. In this case, a bank operating internationally aimed to stay matched in each foreign currency it used in order to minimise its exposure to exchange gains and losses. In the accounts at each balance sheet date the foreign currency assets and liabilities were retranslated into sterling. To the extent that the foreign currency assets and liabilities were matched, exchange gains and losses were netted off in reserves. Only exchange gains and losses on unmatched foreign currency liabilities were taken through the profit and loss account.

The Revenue wanted to override the accounting treatment for tax purposes and bring into charge the exchange profits on the asset side of the transaction (lending to customers). The loss on the liability side (subordinated loan stock) was not allowable, the Revenue argued, because the loan stock was on capital account. The Revenue lost the case. The thrust of the decision was that the company had carefully matched its assets and liabilities to avoid fluctuations caused by exchange rate changes. The Revenue was seeking to tax the company as though it had not taken these precautions. The Courts decided this was not justified.

SP1/87 was issued, after extended consultation, to clarify acceptable practice on matching. This statement no longer applies to companies and was revised in 2002 to reflect this, although it still applies for non-corporates (BIM39521). For companies there followed a full review of the taxation of foreign exchange that led to the enactment of the forex rules in FA 1993.