Christmas Rush: Are You Ready for the New Taxation Regime for Derivatives, Corporate Debt and Foreign Exchange? Mohammed Amin Poses Key Questions That Many Firms Should Already Have Asked Themselves. (Tax)

By Amin, Mohammed | Financial Management (UK), December 2002 | Go to article overview

Christmas Rush: Are You Ready for the New Taxation Regime for Derivatives, Corporate Debt and Foreign Exchange? Mohammed Amin Poses Key Questions That Many Firms Should Already Have Asked Themselves. (Tax)


Amin, Mohammed, Financial Management (UK)


It has been nearly two years since the Inland Revenue announced its fundamental review of the UK tax regulations governing foreign exchange, corporate debt and derivatives. Since then we have had several consultation documents, draft legislation, a finance bill and now the Finance Act 2002. Because all the changes have bean telegraphed so far in advance, it's easy to forget that eventually the dreaded day will come when they take effect. Although the new regulations actually apply to the first accounting period starting on or after 1 October 2002, by far the most common year end for businesses in the UK is 31 December, so for a huge number of companies it's a case of New Year, new tax system.

The reforms revolutionise the tax treatment of derivatives and foreign exchange, and make major alterations to the tax treatment of corporate debt. By now, your tax department or external tax adviser should have reviewed the effects of the new regime, but it's not unknown for such reviews to be left to the last minute. While this short article cannot cover all the details, here are a few questions to ask yourself.

* What kinds of derivatives do we transact? Under the old rules, interest-rate swaps, caps, floors and collars, and foreign currency swaps and forwards, gave rise to taxable income or deductible expenses. Apart from special cases, other derivatives typically gave rise to capital gains or losses. Under the new framework, all derivatives will give rise to income or expense, broadly following the accounts, with a few tightly drawn exceptions for things such as equity derivatives. In cases where you have been hedging a "capital gain" asset with a derivative, if that derivative now receives income/expense treatment the hedge will break down post-tax. Worse still, the derivative may give rise to a taxable gain or loss as it changes its nature on 31 December.

* Have we bought any impaired debt? Under the old regime, purchasing the shares of a company and simultaneously buying its debt at below face value would have been disastrous. Regardless of how good or bad the debt, you were taxable on the purchase discount, because the debt was owed by a "connected person". If the same thing happens under the new regulations there is no automatic taxation of the purchase discount, but the transaction remains a bad move--the gain is still taxable if the debt is repaid in full by your new subsidiary. …

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Christmas Rush: Are You Ready for the New Taxation Regime for Derivatives, Corporate Debt and Foreign Exchange? Mohammed Amin Poses Key Questions That Many Firms Should Already Have Asked Themselves. (Tax)
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