Corporation Tax Act 2009 section 328A

Arrangements that have a "one-way exchange effect"

Section 328A sets out the test for determining whether foreign exchange arrangements have a "one-way exchange effect", which triggers the anti-avoidance rules that prevent companies from structuring their hedging arrangements to generate allowable exchange losses while sheltering equivalent exchange gains from tax.

• Arrangements must include an option or a relevant contingent contract to be tested — standard commercial hedges using plain loans, cross-currency swaps or forward contracts are generally outside scope.
• On each defined "test day" in an accounting period, the company compares the net allowable exchange losses actually arising (amount A) with the net taxable exchange gains that would have arisen had the currency moved by the same amount in the opposite direction (amount B); if A and B are unequal on any test day, there is a one-way exchange effect.
• Even where A and B are unequal, the arrangements are not caught unless the inequality depends on the forex matching rules — if the asymmetry would exist regardless of matching, the provision does not apply.
• Where a test day falls part-way through an accounting period, exchange gains and losses on arrangement instruments must be calculated as if the accounting period ended on that test day, effectively requiring a notional balance sheet to be drawn up at that date.