The Exchange Gains and Losses (Bringing into Account Gains or Losses) Regulations 2002

Explanatory Note

(This note is not part of the Regulations)

Following the repeal of paragraph 4 of Schedule 9 to the Finance Act 1996 (c. 8) (and, in consequence, sections 125 to 169 of the Finance Act 1993 (c. 34)) by section 79(1) of the Finance Act 2002 (c. 23), the tax treatment of exchange gains and losses will be governed by the provisions relating to loan relationships in Chapter 2 of Part 4 of the Finance Act 1996 and derivative contracts in Schedule 26 to the Finance Act 2002.

Subsection (1) of section 84A of the Finance Act 1996 (inserted by paragraph 3 of Schedule 23 to the Finance Act 2002) (“section 84A”) provides that any profits, gains and losses arising to a company from its loan relationships and related transactions include exchange gains and losses arising to the company. Subsection (3) of that section provides that subsection (1) does not have effect in relation to certain exchange gains and losses. Subsection (8) of that section, together with paragraph 26(5) of Schedule 23 to the Finance Act 2002, provides that the Treasury may make regulations for the bringing into account of amounts in relation to which subsection (1) does not have effect and amounts reduced to nil under the Exchange Gains and Losses (Alternative Method of Calculation of Gain or Loss) Regulations 1994 (S.I. 1994/3227).

Schedule 26 to the Finance Act 2002 (“Schedule 26”) provides for a new regime under which the taxation of profits arising to a company from certain derivative contracts are chargeable to tax as income. Sub-paragraph (1) of paragraph 16 of that Schedule (“paragraph 16”) provides that the profits and losses arising from such contracts and related transactions include exchange gains and losses. Sub-paragraph (3) of that paragraph provides that sub-paragraph (1) does not have effect in relation to certain exchange gains and losses. Sub-paragraph (8) of that paragraph provides that the Treasury may make regulations for the bringing into account of amounts in relation to which sub-paragraph (1) does not have effect.

These Regulations provide for the bringing into account of amounts and are made under subsection (8) of section 84A and sub-paragraph (8) of paragraph 16.

Regulation 1 provides for citation, commencement and effect. The Regulations have effect in relation to accounting periods beginning on or after 1st October 2002.

Regulation 2 provides for interpretation.

Regulation 3 prescribes the circumstances in which amounts are to be brought into account.

Regulation 4 provides for a general rule for bringing amounts into account.

Regulation 5 provides for the calculation of the amounts to be brought into account under regulation 4.

Regulation 6 provides for a different rule for bringing amounts into account in the case of assets representing certain loan relationships and ships or aircraft.

Regulation 7 makes supplementary provision in relation to the interpretation of regulations 5 and 6.

Regulation 8 provides for a special rule for bringing into account amounts where the disposal is a no gain/no loss disposal under the Taxation of Chargeable Gains Act 1992 (c. 12) (“the 1992 Act”).

Regulation 9 provides for a special rule for bringing into account amounts where there is no disposal of the asset for the purposes of the 1992 Act by virtue of section 116(10) of that Act.

Regulation 10 provides for a special rule for bringing into account amounts where, but for section 116 of the 1992 Act, section 127 of the 1992 Act would apply in relation to a transaction involving original shares which are or include an asset as regards which paragraph (2)(a), but not paragraph (2)(b), of regulation 8 of these Regulations has had effect.

Regulation 11 provides for a special rule for bringing into account amounts where there is no disposal of the asset for the purposes of the 1992 Act by virtue of section 127 of that Act.

Regulation 12 provides for a special rule for bringing into account amounts where section 127 of the 1992 Act applies in relation to a transaction involving original shares which are or include an asset as regards which paragraph (2)(a), but not paragraph (2)(b), of regulation 8 of these Regulations has had effect.

Regulation 13 provides for a special rule for bringing into account amounts where exchange gains or losses have fallen within subsection (4) of section 84A.