UK Government Targets Currency Derivatives Tax Scheme

by Robert Lee, Tax-News.com, London

05 May 2004

The UK government is said to have rounded on a tax loophole that has offered several large firms big tax savings through the tax treatment of derivatives, which the Treasury says could cost it £1 billion in lost corporate tax receipts.

According to a report in the Financial Times, the firms involved entered into currency swap transactions with banks in order to cover the risks associated with changes in exchange rates where one currency is swapped for another at a future date.

The Treasury is contesting large corporate tax deductions made by the firms in question on the initial payments made to the banks before the settlement of the swap deals, payments which do not appear in company accounts.

Whilst the government eliminated tax deductions on certain derivatives transactions in the 2002 budget, the measures were not due to take effect until the fiscal year commencing after October of that year.

It is reported that the firms are likely to argue that the tax deductions are permitted under 1994 legislation.

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