Revenue Foreign Exchange Proposals May Leave UK Companies With Unexpected Tax Bills

by Amanda Banks, Tax-News.com, London

01 August 2001

According to PricewaterhouseCoopers (PwC), changes proposed by the Inland Revenue to the taxation of international financing and trading transactions may well leave companies with unexpected - and large - tax bills for the current accounting year.

Last week the Inland Revenue published a consultative document entitled 'Corporate Debt, Financial Instruments and Foreign Exchange Gains & Losses,' which proposes changes in three main areas and seeks to reform the legislation which contains the rules for taxing companies. The Inland Revenue set out the changes as follows:

• the separate block of legislation on companies' foreign exchange gains and losses will be assimilated into the Corporate Debt (Loan Relationships) and Financial Instruments legislation
• the scope of the Financial Instruments legislation will be extended to cover, depending on the outcome of the consultation, either most or all derivative financial instruments
• to make them fairer, there will be changes in the way the Loan Relationships rules deal with bad debts where borrower and lender are connected

The document also contains measures to counter avoidance schemes which have been known to exploit the current Loan Relationships and Financial Instruments legislation. The anti-avoidance measures are retrospective as they will apply to the accounting periods ending on or after 26 July, 2001. PwC is of the opinion that many of the measures will actually destroy the tax neutrality of commercial arrangements, creating a tax liability where there is no economic profit thus leaving companies with huge tax bills for the current year.

Derek Jenkins, corporate tax partner with PwC, has stated: 'The Revenue has suggested some welcome measures to simplify the legislation. However, other provisions could create real commercial difficulties. The Revenue claims to have listened to business over the last six months, but it has failed to act on many of their concerns.'

He added: 'The only real concession the Revenue makes to business, concerning buying connected party debt obligations from third parties, will not take effect until 2002, despite the Revenue acknowledging that current legislation disadvantages many businesses. This is in contrast to the retrospective application of the anti-avoidance measures, where it is the Revenue who is being disadvantaged.'

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