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The rules on the tax treatment of hedges of net investment in a foreign
operation (“forex matching”) are being changed, in two stages. The first
change will be relevant to companies that apply IFRS or modified UK GAAP,
and are seeking to secure tax-effective forex matching under the Disregard
Regulations (SI 2004/3256). The second change is more wide-ranging.
The first change is that the Disregard Regulations will be amended later
this year to allow companies to elect to match the underlying net asset
value of shares in foreign operations, rather than the book value as at
present. The change will apply to periods of account beginning on or after 1
January 2008, and the deadline for making an election will be the later of
31 March 2008 and 30 days from the start of the first affected accounting
period. Informal consultation on the change is taking place.
The second change is that a new set of regulations dealing exclusively with
forex matching will be laid next year, to have effect from 1 January 2009.
The new regulations will bring together those provisions applicable to
companies who still account for foreign currency transactions under SSAP 20
(enabling the primary legislation in section 84A FA 1996 and paragraph 16
Schedule 26 FA 2002 to be repealed) and those applicable to companies
accounting under IFRS or modified UKGAAP. HMRC will be issuing a Technical
Note, together with draft regulations, for consultation in the first quarter
of 2008.
Our view
The Disregard Regulations were introduced from 2005 to allow the
continuation of most forms of hedge accounting for tax purposes, in
particular where these are not permitted in individual company accounts
prepared under IFRS or modified UKGAAP. The forex matching provisions in
the Regulations have been seen as a short-term solution; the first
change above is a further “sticking plaster” solution for one of the
significant practical problems identified.
The long term solution aims to consolidate the provisions currently
contained in primary and secondary legislation in one place.
Informal consultation is in progress on both changes via the HMRC IAS39
Working Group, which includes participants from the professions,
commerce and industry. |
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