Plan to counter exchange rate uncertainty

The Government plans to change tax rules so that both businesses and the Exchequer are protected from the uncertainty of exchange rate movements during the period of a rights issue of shares, the financial secretary to the Treasury, Stephen Timms, has announced.

Such a move will ensure that where a company is making a rights issue of shares to strengthen its capital base that is denominated in a different currency from its accounting currency, it can protect the capital raised from exchange rate risk in a way that is tax-neutral for the company and the Exchequer.

Any exchange gain or loss on the hedging instrument in such situations will be disregarded, consistent with the tax treatment of other types of hedging transactions.

This will remove the exchange rate tax risk posed to Exchequer under the current tax treatment of companies hedging against exchange rate movements on the proceeds of a rights issue.

To ensure that the full value of the rights issue will bolster the company’s capital position, any gain arising from the hedging transaction that is subsequently distributed to shareholders will be taxed in the normal way.

The planned measure will apply to hedging transactions undertaken on or after 1 January 2009 and still current on 10 March.

Draft regulations and the accompanying explanatory memorandum will be published on HMRC’s website.

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