The Exchange Gains and Losses (Debts of Varying Amounts) Regulations 1994

Explanatory Note

(This note is not part of the Order)

These Regulations, which come into force on 23rd March 1995, insert a new section 136A into the Finance Act 1993. The new section supplements section 136 of the Finance Act 1993, which provides for the “ring-fencing” of exchange losses (by preventing relief otherwise than by set-off against future exchange gains on the same loan) where a loan is entered into on non-arm’s length terms.

The provisions in the new section apply where an exchange loss arises under section 127 of the Finance Act 1993 on a debt which varies in amount. The provisions are based on those in section 136(4) to (12) and (15) (which apply to debts which do not vary in amount), with modifications to take account of the need to compare the actual and adjusted amounts of a loan at any time in an accrual period when these amounts are different. They provide exclusions from the ring-fencing rule in section 136(2) where:~

• the terms of the loan would have been the same if the parties had been dealing at arm’s length, except for the amount of the loan (subsections (2) to (4));

• or ~a loan is regarded as not having been made on arm’s length terms solely because interest has not been charged, or has been charged at lower than a commercial rate, and interest, or additional interest, is treated as having been charged under section 770 of the Income and Corporation Taxes Act 1988 (subsections (5) to (8)); or~

• the parties to the loan transaction are both members of the same United Kingdom group of companies and a taxable exchange gain accrues as respects the loan transaction to one of the parties (subsections (9) to (11)).