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Session 2008 - 09
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Finance Bill

Finance Bill
Schedule 21 — Foreign exchange: anti-avoidance
208

Schedule 21
Section 43

Foreign exchange: anti-avoidance
Loan relationships
1
Chapter 3 of Part 5 of CTA 2009 (loan relationships: credits and debits to be
taken into account) is amended as follows.
5
2
In section 328 (exchange gains and losses), after subsection (4) insert—
“(4A)
Subsections (3) and (4) do not have effect to disapply subsection (1)
in the case of an exchange gain arising in an accounting period of a
company so far as—
(a)
the exchange gain arises in relation to an asset or liability
10
representing a loan relationship of the company,
(b)
the loan relationship is part of arrangements that have a one-
way exchange effect in relation to the company in the
accounting period (see section 328A), and
(c)
the arrangements cause the company or any other company
15
to gain a tax advantage (other than a negligible tax
advantage).”
3
After that section insert—
“328A
Arrangements that have a “one-way exchange effect”
(1)
For the purposes of section 328, arrangements (“the arrangements”)
20
have a “one-way exchange effect” in relation to a company
(“company A”) in an accounting period of that company (“the
relevant accounting period”) if the following two conditions are met.
(2)
The first condition is that the arrangements include an option or a
relevant contingent contract.
25
(3)
The second condition is that, in relation to any day in the relevant
accounting period (“the test day”)—
(a)
amount A is not equal to amount B, and
(b)
the difference between amounts A and B is not the same as it
would be were those amounts calculated disregarding the
30
matching rules.
(4)
Amount A is—
(a)
the sum of the relevant exchange losses of company A, and of
each company connected with company A, that arise in
accounting periods of those companies that end on the test
35
day, less
(b)
the sum of the relevant exchange gains of those companies
that arise in such accounting periods.
(5)
Amount B is—
(a)
the sum of the relevant exchange gains of company A, and of
40
each company connected with company A, that would have
arisen in accounting periods of those companies that end on
the test day, less
(b)
the sum of the relevant exchange losses of those companies
that would have arisen in such accounting periods,
45

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Schedule 21 — Foreign exchange: anti-avoidance
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if exchange gains and losses of those companies in those accounting
periods were calculated in accordance with section 328D
(counterfactual currency movement assumptions).
(6)
For the purposes of subsections (4) and (5), an accounting period of
company A, or of a company connected with company A, in which
5
the test day falls and that does not end on that day is to be treated as
if it did end on that day.
(7)
In this section “the matching rules” means—
(a)
section 328(3) and (4), and
(b)
section 606(3) and (4).
10
328B
Meaning of “relevant exchange gain” and “relevant exchange loss”
(1)
For the purposes of section 328A an exchange gain or loss of a
company is “relevant” if—
(a)
it arises in relation to—
(i)
an asset or liability representing a loan relationship to
15
which the company is a party, or
(ii)
a relevant contract to which the company is a party,
(b)
the loan relationship or relevant contract is part of the
arrangements, and
(c)
a debit or credit in respect of the exchange gain or loss is
20
required to be brought into account by the company for the
purposes of corporation tax.
(2)
For the purposes of subsection (1)(c)—
(a)
the arrangements are to be treated as not having a one-way
exchange effect in relation to the company for the purposes of
25
section 328 or 606 (if they would otherwise have had such an
effect), and
(b)
sections 441 and 442 (loan relationships: unallowable
purposes) and 690 to 692 (derivative contracts: unallowable
purposes) are to be disregarded.
30
328C
Meaning of “test day”
(1)
This section makes provision for the purposes of section 328A as to
whether a day in an accounting period of company A is a “test day”.
(2)
In the case of arrangements that include one or more options, a day
in the accounting period is a “test day” if it is—
35
(a)
a day on which such an option is exercised,
(b)
a day on which such an option that is not exercised in the
accounting period was capable of being exercised,
(c)
a day on which company A, or a company connected with
company A, ceased to be a party to such an option,
40
(d)
a day on which a terms of such an option are varied, or
(e)
the last day of the accounting period.
(3)
In the case of arrangements that include one or more relevant
contingent contracts, a day in the accounting period is a “test day” if
it is—
45
(a)
a day on which an operative condition of such a contract is
met,

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(b)
a day on which company A, or a company connected with
company A, ceased to be a party to such a contract,
(c)
a day on which a terms of such a contract are varied, or
(d)
the last day of the accounting period.
328D
Counterfactual currency movement assumptions
5
(1)
This section makes provision for the purposes of section 328A(5) as
to the calculation of exchange gains and losses of a company arising
in an accounting period of that company.
(2)
Where the relevant foreign currency appreciates over the accounting
period, or any part of the accounting period, relative to the operating
10
currency of company A by any percentage, the calculation must be
made on the assumption that the relevant foreign currency instead
depreciates (over the same period and in relation to the same
currency) by that percentage.
(3)
Where the relevant foreign currency depreciates over the accounting
15
period, or any part of the accounting period, relative to the operating
currency of company A by any percentage, the calculation must be
made on the assumption that the relevant foreign currency instead
appreciates (over the same period and in relation to the same
currency) by that percentage.
20
(4)
For provision as to the treatment of certain options for the purposes
of the calculation in cases in which subsection (2) or (3) applies, see
section 328E.
(5)
Except as provided for in that section, the calculation must be made
on the basis of transactions in fact entered into (and not on the basis
25
of transactions that would have been entered into on the assumption
specified in subsection (2) or (3)).
(6)
In this section “relevant foreign currency” means—
(a)
the currency in which the loan relationships or relevant
contracts in respect of which the exchange gains or losses
30
arise are denominated, or
(b)
where the exchange gains or losses arise in respect of loan
relationships or relevant contracts denominated in more than
one currency, any of them.
(7)
References in this section to the “operating currency” of a company,
35
in relation to an accounting period, are (subject to subsection (8)) to
the currency in which profits or losses of the company arising in that
accounting period that fall to be computed in accordance with
generally accepted accounting practice for corporation tax purposes
are required to be computed by virtue of section 92(1), 92A(2),
40
92B(2)(a) or 92C(3)(a) of FA 1993 (foreign currency accounting).
(8)
In relation to a loan relationship or relevant contract to which a
company is deemed to be a party under—
(a)
section 381(2) and (3) (loan relationships involving firms), or
(b)
section 620(2) (relevant contracts involving firms),
45

references in this section to the “operating currency” of the company,
in relation to an accounting period, are to the currency that would be

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Schedule 21 — Foreign exchange: anti-avoidance
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the operating currency of that firm in that accounting period if that
firm were a company.
328E
Counterfactual currency movement assumptions: treatment of options
(1)
This section applies in relation to the calculation for the purposes of
section 328A(5) of exchange gains and losses of a company arising in
5
an accounting period of that company where—
(a)
the calculation is made on the assumption specified in
subsection (2) or (3) of section 328D (“the relevant
assumption”), and
(b)
an option is part of the arrangements.
10
(2)
Subsection (3) applies if the option is exercised on the test day.
(3)
The option is to be treated as not having been exercised on the test
day if, on the relevant assumption, it is in all the circumstances more
likely than not that it would not have been exercised on that day.
(4)
Subsection (5) applies if the option is not exercised on the test day but
15
was exercisable on that day.
(5)
The option is to be treated as having been exercised on the test day
if, on the relevant assumption, it is in all the circumstances more
likely than not that it would have been exercised on that day.
328F
Meaning of “option”
20
(1)
In the Part 5 one-way exchange effect provisions “option” is to be
construed as if section 580(2) and (3) (meaning of option) were
omitted.
(2)
For the purposes of the Part 5 one-way exchange effect provisions—
(a)
section 584 (hybrid derivatives with embedded derivatives)
25
is to be construed as if in subsection (1)(b) for the words “in
accordance with generally accepted accounting practice, the
company treats” there were substituted “it is possible to
regard”,
(b)
section 585 (loan relationships with embedded derivatives) is
30
to be construed as if in subsection (1) for the words “in
accordance with generally accepted accounting practice a
company treats” there were substituted “it is possible to
regard”, and
(c)
section 586 (other contracts with embedded derivatives) is to
35
be construed as if in subsection (1)(b) for the words “in
accordance with generally accepted accounting practice,
treats” there were substituted “it is possible to regard”.
328G
Meaning of “relevant contingent contract” and “operative condition”
(1)
In the Part 5 one-way exchange effect provisions “relevant
40
contingent contract” means a contract that meets the following two
conditions.
(2)
The first condition is that company A, or a company connected with
company A (“the relevant company”), is a party to the contract.
(3)
The second condition is that the contract includes a condition—
45

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(a)
on the meeting of which a right or liability under the contract
is altered, and
(b)
that operates (directly or indirectly) by reference to the
exchange rate between the operating currency of the relevant
company and another currency.
5
(4)
In this section “operating currency” has the same meaning as in
section 328D.
(5)
In the Part 5 one-way exchange effect provisions, “operative
condition” means a condition of the kind mentioned in subsection
(3).
10
328H
Other interpretative provisions
(1)
In this Act “the Part 5 one-way exchange effect provisions” means
sections 328A to 328G and this section.
(2)
The following provisions of this section have effect for the purposes
of the Part 5 one-way exchange effect provisions.
15
(3)
References to arrangements include any agreements,
understandings, schemes, transactions or series of transactions
(whether or not legally enforceable).
(4)
The circumstances to be taken into account in determining whether
a loan relationship or relevant contract is “part of” any arrangements
20
include (in particular)—
(a)
the circumstances in which it was entered into, acquired or
issued,
(b)
the currency in which it is denominated, and
(c)
its likely effect.
25
(5)
References to the currency in which a relevant contract is
denominated are to the currency in which its underlying subject
matter is denominated.
(6)
A currency (“currency A”) appreciates relative to another currency
(“currency B”) over a period if—
30
(a)
the value expressed in currency B of one unit of currency A at
the end of the period, exceeds
(b)
the value expressed in currency B of one unit of currency A at
the beginning of the period,

and the percentage of the appreciation is the amount determined
35
under subsection (7).
(7)
The percentage of the appreciation is—
(a)
the difference between the amounts mentioned paragraphs
(a) and (b) of subsection (6), expressed as a percentage of the
amount mentioned in that paragraph (b), or
40
(b)
if lower, 100%.
(8)
A currency (“currency A”) depreciates relative to another currency
(“currency B”) over a period if—
(a)
the value expressed in currency B of one unit of currency A at
the end of the period, is less than
45

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213

(b)
the value expressed in currency B of one unit of currency A at
the beginning of the period,

and the percentage of the depreciation is the difference, expressed as
a percentage of the amount mentioned in paragraph (b).
(9)
References to a company connected with company A are to a
5
company connected with company A for the relevant accounting
period.
(10)
Section 466 (companies connected for an accounting period) applies
for the purposes of subsection (9).
(11)
The following provisions apply for the purposes of the Part 5 one-
10
way exchange effect provisions—
section 577 and 578 (meaning of “relevant contract” etc),
sections 580 (meaning of “option”),
section 583 (meaning of “underlying subject matter”),
section 584 (hybrid derivatives with embedded derivatives),
15
section 585 (loan relationships with embedded derivatives), and
section 586 (other contracts with embedded derivatives).
(12)
See section 328A for the meaning of the following expressions—
“the arrangements”;
“company A”;
20
“the relevant accounting period”;
“the test day”.”
Derivative contracts
4
Chapter 3 of Part 7 of CTA 2009 (derivative contracts: credits and debits to
be brought into account) is amended as follows.
25
5
For the heading before section 606 (exchange gains and losses) substitute—
“Exchange gains and losses”.
6     (1)
Section 606 is amended as follows
      (2)
In subsection (3), for paragraph (a) (together with the “and” at the end)
substitute—
30
“(a)
condition A or B is met, and”.
      (3)
In subsection (4), for the words from “so much” to “currency as” substitute
“an exchange gain or loss of a company so far as—
(a)
condition A is met, and
(b)
it”.
35
      (4)
After that subsection insert—
“(4A)
Condition A is that the exchange gain or loss arises in relation to a
derivative contract whose underlying subject matter consists wholly
or partly of currency.
(4B)
Condition B is that the exchange gain or loss arises as a result of the
40
translation from one currency to another of the profit or loss of part
of the company’s business.

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(4C)
Subsection (4D) applies where—
(a)
condition A is met, and
(b)
the amount that is recognised in respect of the exchange gain
or loss as mentioned in subsection (3)(b) (“the recognised
gain or loss”) is not calculated by reference to spot rates of
5
exchange.
(4D)
Where this subsection applies—
(a)
the recognised gain or loss is to be treated for the purposes of
this Part as comprising two separate exchange gains or losses,
namely—
10
(i)
an exchange gain or loss calculated by reference to
spot rates of exchange, and
(ii)
a residual exchange gain or loss, and
(b)
subsections (3) and (4) do not have effect in relation to the
residual exchange gain or loss.”
15
      (5)
After subsection (4D) (inserted by sub-paragraph (4) above) insert—
“(4E)
Subsections (3) and (4) do not have effect to disapply subsection (1)
in the case of an exchange gain arising in an accounting period of a
company so far as—
(a)
the exchange gain arises in relation to a derivative contract
20
whose underlying subject matter consists wholly or partly of
currency,
(b)
the derivative contract is part of arrangements that have a
one-way exchange effect in relation to the company in the
accounting period (see section 606A), and
25
(c)
the arrangements cause the company or any other company
to gain a tax advantage (other than a negligible tax
advantage).”
7
After that section insert—
“606A
Arrangements that have a “one-way exchange effect”
30
(1)
For the purposes of section 606, arrangements (“the arrangements”)
have a “one-way exchange effect” in relation to a company
(“company A”) in an accounting period of that company (“the
relevant accounting period”) if the following two conditions are met.
(2)
The first condition is that the arrangements include an option or a
35
relevant contingent contract.
(3)
The second condition is that, in relation to any day in the relevant
accounting period (“the test day”)—
(a)
amount A is not equal to amount B, and
(b)
the difference between amounts A and B is not the same as it
40
would be were those amounts calculated disregarding the
matching rules.
(4)
Amount A is—
(a)
the sum of the relevant exchange losses of company A, and of
each company connected with company A, that arise in
45
accounting periods of those companies that end on the test
day, less