Unfair HMRC tactics: Inter Group F e/x hedging instruments

Unfair HMRC tactics: Inter Group F e/x hedging...

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Group Structure: UK Holding Company (Company A) - 61% owned Foreign subsidiary (Company B) - 100% owned UK sub-subsidiary (Company C).

Company A loans Company C in 2007 'mid term' funds for working capital in foreign currency. Company A and C commercially contract at the time to cover each others f e/x losses.

At year end 2008, Company C reports a substantial f/ex loss of £500K on the loan from Company A.  Company A reports an f/ex gain of £500K on the corresponding loan to company C. (From a Group perspective it will always be a zero position).

Company C subsequently charges Company A through the inter company account the £500K  f e/x loss incurred against the hedge contract it holds.

Thus both companies A and C now report a net break even position, rather than one a profit and the other a corresponding and equal loss.

HMRC accepted the accounts of the sub subsidiary (Company C) showing f e/x loss of £500k, offset by the f e/x hedge income of £500k. (net income = nil)

When it comes to the accounts of the holding company (Company A) however HMRC argue the cost of the hedge contract and offset against the f e/x gain, is NOT allowable.

HMRC position is to ignore the commercial contract between Company A and Company C and choose to classify the £500K cost in company A as a write off of the loan to a connected party (even though it accepted the income in company C to tax) , thus disallowing it in Company A and raising not only a tax charge on the £500K f e/x gain but also applying interest and penalties.

Company A has asked HMRC to clarify their position if the foreign exchange movement had been opposite, ie. a gain in Company C and a loss in Company A.Company asked would HMRC allow the inter company hedge charge against tax in Company C  (it after all accepted the income to tax) and would HMRC not then charge the income in Company A to tax (it after all chooses to disallow the cost)?  HMRC refused to answer.  

Company A asked under what authority HMRC were acting in ignoring a commercial contract between two parties and to make assertions which only sort to gain HMRC income. HMRC refused to answer.

It seems therefore if its a profit - HMRC will tax it, if it's a loss however - HMRC  will reclassify it to a dis-allowable heading. Heads HMRC win - tails Tax payer  loses! 

Company A has run up substantial professional costs (£20K plus to date) in arguing the position. HMRC remain intransigent, but has offered Company A a chance to settle otherwise it goes to Court and yet more cost to Company A.

Does anyone have similar experience and does anyone have any suggestions as to how we can stop these bully boy tactics?

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By uktaxpal
26th Aug 2011 20:10

Why Fex loan to uk coy ?

Why did A loan C fC when C is a UK based coy.Logically A would have loaned B fC to purchase FA as a hedge? 

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By TMR
30th Aug 2011 14:36

see below

A had funds in foreign currency which it lent to C to buy stock in that foreign currency.  Any thoughts?

 

Rgds

TMR

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By thisistibi
30th Aug 2011 15:57

Wrong

It cannot be a write off of a loan to a connected party, because the full amount of the loan in the foreign currency is still outstanding in the books.  I would try and lean on HMRC futher and imply that they haven't correctly understand the accounting.  Try and call the Inspector to speak on the phone or arrange a meeting. 

Co A has basically contracted with Co C to hedge its risk on the loan - that means that Co A took a risk which it could gained, or lost, money on.  In the final event - for this period at least - it made a loss.  Of course it's not commercial, because there is not an arm's length profit margin in the hedging contract - but assuming your group is an SME, then there is an exemption from transfer pricing and HMRC are not in a position to recategorise a genuine transaction as something it isn't.

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By uktaxpal
31st Aug 2011 13:07

final review
Have you complained and received a final review letter?

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