Forex anomaly removed

From 1 January 2009 hedging transactions that are reversed following a change of accounting treatment will not give rise to double taxation or relief.

Baker Tilly analysis

The change will correct an anomaly whereby hedging transactions of multinational businesses are currently subjected to double taxation under regulations on loan relationships and derivatives introduced in 2004.

Matching provisions meant that hedge transactions entered into before 2004 were not subject to tax on forex differences. However, where:

• a company has changed accounting practice in relation to forex differences; and
• there is a reversal of a matched gain or loss that was not taxable before the 2004 regulations came into force.
• This is a sensible measure designed to tax the commercial substance of the transaction as reflected in the accounts.

In detail

Under the Loan Relationships and Derivative Contracts (Change of Accounting Practice) Regulations 2004, SI2004/3271 which came into effect for accounting periods that began after 31 December 2004, a change of accounting treatment due to the adoption of new international accounting standards or their UK equivalents would already have been brought into account by transitional provisions which spread the effect of changes over ten years. However, an unforeseen effect of these regulations is that a reversal of a forex credit or debit subject to the transitional provisions would also have to be brought into account for tax on the occasion of the reversal which did not reflect the commercial substance of the underlying transaction.

Draft regulations are to be published 'shortly' and will be the subject of a consultation. The process of consultation and laying the legislation may mean that the legislation will be retrospective.