UK Addresses Tax Issues Surrounding Company Forex Hedging

13 August 2009

HM Revenue and Customs (HMRC) has published a technical note setting out proposals for how the risk to the Exchequer from company foreign exchange hedging arrangements can be removed in a “targeted manner.”

According to HMRC, the proposals “do not seek to disturb in any way” the treatment of trading gains and losses on unhedged speculative positions taken by financial traders and others in financial instruments that are not part of what could be considered to be tax avoidance arrangements. What they do intend to achieve, however, is to target those groups which seek to offset their risks through “structured financial arrangements.”

The government says that its current approach to the taxation of hedging transactions is to ensure that legitimate commercial hedging transactions can be carried out on a tax neutral basis. In other words, where a company undertakes a commercial transaction and also enters into a hedging transaction to offset an economic risk from that commercial transaction, the tax rules aim to provide for that hedge to be as effective after tax as it was before the tax treatment of the hedged item and hedging instrument are taken into account.

However, according to the 2009 budget: “The government is aware of certain structured arrangements (often described as overhedging or underhedging) which, although not normally undertaken for tax avoidance, involve fragmenting transactions across group companies to ensure the Exchequer bears the full economic risk to the group. The government believes that the economic risks should be shared between the Exchequer and business as Parliament intended.”

The government is inviting comments on the new proposals until September 30, 2009.

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