CFM9346 - Taxing forex: bringing into account: basic rules for bringing amounts into account

Regulation 4 of SI 2002/1970

Regulation 4, SI2002/1970applies where:

• there is a disposal of an asset, and
• an exchange gain or loss has arisen on the asset in an accounting period beginning on or after 1 October 2002, and
• in accordance with GAAP, an exchange loss or gain (or part of one) on a liability or a currency contract has been taken to reserves, and
• it is set off against an exchange gain or loss on the asset.

It therefore applies in those cases where exchange gains or losses on borrowings or currency contracts that hedge assets have not hitherto been brought into account, in accordance with FA96/S84A(3) or FA02/SCH26/PARA16(3). See CFM9340.

Disposal is defined in Reg 2 (2)(a), SI2002/1970 as any event that is treated as a disposal by TCGA 1992 and includes part disposals. TCGA also governs the time of disposal as a result of Reg 2(2)(b). When there is a disposal of a matched asset, Reg 4 provides that any net gain or net loss is brought into account for the accounting period in which the disposal occurs. A net gain is brought into charge as a chargeable gain, while a net loss is relieved as an allowable loss.

This CG charge or allowance is a separate matter from any CG computation on the disposal of the asset.

Regulation 5, SI2002/1970governs the amount to be brought into account. It is the aggregate of all the exchange gains and losses that accrued on liabilities or currency contracts insofar as they were matched with the gains or losses on the asset. CFM9370+ explains how to calculate this amount.

Clogged losses

If a company disposes of shares to an unconnected party and realises a loss, it can offset that capital loss against any exchange gain arising on a 'matched' liability or currency contract. Overall, no tax liability will arise on exchange gains and losses that have been matched in the accounts.

But if the company disposes of the shares to a connected person, any loss on the disposal will be clogged under TCGA92/S18 (3) (see CG14561). It can only be set against gains arising on transactions with the same connected person so that, without any special rule, the company would not be able to offset the loss against gains on the matched liability. Reg 5(4) provides such a special rule, enabling otherwise clogged losses to be deducted from an aggregate gain arising on the matched liability or currency contract.