CFM10015 - Taxing FOREX: transitional arrangements: the 1994 Regulations (SI1994/3226)

The 1994 Regulations (SI1994/3226)

This guidance describes the post-FA 2002 taxation of loan relationships, derivative contracts and FOREX.

When the FA 1993 rules were introduced these regulations dealt with assets and liabilities to which Case I or CG treatment applied before commencement of those FA 1993 rules.

Regulation 6(3) assets

Assets that were within the CG rules before commencement of the FA 1993 rules and were qualifying assets for FOREX after commencement are known as Reg 6(3) assets. These included

• foreign currency bank accounts,
• foreign cash, and
• foreign currency debts on securities (other than deep gain securities and convertibles).

Under Reg 9, a company had to calculate the attributed gain or loss for each Reg 6(3) asset. This is the chargeable gain or loss that would have arisen had there been a disposal of the CG asset immediately before the FA 1993 commencement day.

There were then rules to offset the attributed gain or loss against post-commencement exchange gains and losses.

Reg 13 applied on the subsequent disposal of the asset to ensure that any part of the attributed gain or loss that had not been offset against post-commencement exchange gains and losses was brought into account on disposal.

Some companies made elections under Reg 14(5) to set a net allowable loss under Reg 13 against future exchange gains.

SI2002/1969 introduces a new Reg 14B into the old regulations of SI1994/3226. It provides that

• any net allowable loss covered by an election under Reg 14(5) SI1994/3226
• but not taken into account by the end of the last FA 1993 AP

is treated as a loan relationship debit in the first AP to which the FA 2002 rules apply.

Stranded losses

Some companies made elections to relieve stranded losses under Reg 16(1) of the 1994 regulations. Stranded losses were certain capital losses realised before commencement and not relieved under TCGA92/S8 (1) or TCGA92/SCH7A. This applied to losses on

• assets that would have been qualifying assets had the company not disposed of them before the FA 1993 commencement day, and
• currency contracts and options and interest rate contracts and options previously within TCGA92/S143.

The election enabled the company to set stranded losses against certain post-commencement exchange gains on similar assets.

SI2002/1969 introduces a new Reg 14B into the old SI1994/3226. It provides that

• any stranded losses covered by an election under Reg 16(1) SI1994/3226
• but not taken into account by the end of the last FA 1993 AP

are treated as loan relationship debits in the first AP to which the FA 2002 rules apply.

New Reg 13 and elections

Some companies will still hold assets and liabilities that were held pre-commencement FA 1993 on which cumulative exchange gains and losses have been calculated each year under Regs 8 to 12, SI1994/3226.

Reg 13 SI1994/3226 originally dealt with these assets and liabilities on disposal by substituting a deemed exchange gain or loss in cases where there was an attributed gain or loss that had not been fully offset post-commencement. This applied to

• Reg 6(3) assets, and
• assets and liabilities taxed pre-commencement as part of Case I profits.

Reg 13 is amended by SI2002/1969 to create a deemed gain or loss where the asset or liability is held immediately after the end of the last accounting period to which the FA 1993 regime applies. The resulting gain or loss is brought into charge in the first accounting period to begin on or after 1 October 2002.

The method of charge or relief depends on the nature of the asset:

• If the deemed gain or loss arises on a Reg 6(3) asset, CG treatment applies.
• In all other cases, the amount is brought in as a loan relationship credit or debit.

A company can elect under Reg 14(1) to defer bringing into account these deemed gains and losses until the asset or liability ceases to be held or owed.

This election cannot be made if an election under Reg 14A is also made in respect of the same losses. The Reg 14A election allows a company to relieve net losses on Reg 6(3) assets as loan relationship debits.

Both elections must be made within 2 years of the end of the last accounting period to which the FA 1993 regime applies.