Accountancy Age has learned the Inland Revenue warned at a confidential meeting in January that the chancellor could use the Budget to scrap legislation that allows relief on foreign exchange losses in favour of using a new test for deciding whether currency transactions are eligible for tax deductions.
Experts fear the test, the notorious paragraph 13 of the loans relationship rules, is so loosely drafted it could be interpreted harshly by a Revenue seeking to impose it as an anti-avoidance measure. As a result, huge uncertainty remains over how the test could be applied.
PricewaterhouseCoopers tax partner Derek Jenkins said: ‘If the tax relief measures are abolished, UK companies will be left at a tax disadvantage. They will have to pay tax on exchange gains but get no relief on losses.’
If the changes go ahead they will put further pressure on exporters already hit by the strong pound, and could consequently foster further support for the euro.
Technically the chancellor is proposing to integrate foreign exchange legislation with the loans relationship legislation which uses paragraph 13. Consultation has been underway for some time but the January meeting was the first indication of the direction of Treasury thinking.
The paragraph 13 test examines whether a transaction is an ‘unallowable purpose’ with regard to tax relief by asking if it has been made for tax avoidance reasons. Anti-avoidance measures exist in the current foreign exchange rules but the paragraph 13 test is could be much tighter.
Alison Christian, of KPMG, said: ‘Our view is that extending the unallowable purposes provisions would create further uncertainty for taxpayers.’
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