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HMRC consults on foreign currency gains

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2nd Aug 2012
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HMRC has kicked off a consultation on whether companies with a non-sterling functional currency should continue to be required to compute their chargeable gains and allowable losses in sterling.

The current rules require a company to calculate its capital gains and losses in sterling, even if the company draws up its accounts in a foreign currency.

The government published the consultation document because it was told that shares in group companies that are no longer needed for commercial or business purposes are being retained unnecessarily because of potential exposure to gains arising from foreign exchange movements since acquisition.

The proposed changes will affect non-UK headed groups with a UK sub-group, in which the sub-group holds less than 10% of the shares. Where the shareholding is more than 10%, the substantial shareholding exemption should provide relief from capital gains tax on the disposal of shares.

The proposals will particularly affect those with clients who want to liquidate a UK company in which it owns less than 10% of the shares but is afraid to do so because it would give rise to taxable foreign exchange gains.

As reported in a recent Gabelle tax analysis, complaints have been made by these organisations that they cannot liquidate dormant companies because this would trigger a tax charge as a result of currency fluctuations.

Priya Dutta, a senior tax consultant at Gabelle, said: “The rules apply not only to ‘real’ third party disposals of shares by a group but also to intra-group transfers within the group, as companies in the same group may have different functional currencies.”

Law firm Pinsent Masons was quick to respond to the news, asking whether the door had been opened on tax refund claims following EU challenge.

Ray McCann, a director Pinsent Masons, said: “HMRC has been forced into making the changes by the EU, who argued that existing rules breached EU law.

“There’s now potentially an opportunity for businesses and individuals who have lost out under the current rules to try and reclaim their payments from the government where the rules have been applied in a way contrary to EU law. Successful claims could potentially cost HMRC millions of pounds.”

McCann added, “The other concern is that the government’s aims to introduce the changes in April next year, so there’s a risk that this could be a rush-job that would hurt rather than help UK businesses.”

The consultation was published on 30 July and runs up until 22 October. The government is expecting to introduce legislation in Finance Bill 2013 but with retrospective effect from 6 April 2012.

It is also considering including an anti-avoidance rule so that functional currencies cannot be manipulated to gain an unfair tax advantage.

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