InSmith and Nephew Overseas and others v HMRC[2017] UKFTT 151 (8 February 2017), the FTT found that losses incurred as a result of a change in functional currency were allowable.
Following a change in its functional currency, from sterling to US dollars, as the result of a company reorganisation, Smith and Nephew and its two sister companies claimed foreign exchange losses totalling over $1m, arising as a result of the fall in value of the pound against the US dollar. HMRC disallowed the losses.
There were three issues. The first one was whether the appellants’ accounts complied with GAAP for the purpose of the loan relationship rules. This depended on the correct approach when accounting for a change in functional currency. The FTT was swayed by the taxpayers’ expert; and by the fact that E&Y had confirmed that the companies’ accounts gave a true and fair view.
The next issue was whether the exchange differences were ‘exchange losses’ within FA 1996 s 103. The FTT noted that an exchange loss is ‘the comparison at different times of the expression in one currency of the valuation put by the company in another currency in relation to an asset’. This is therefore an arithmetic exercise and the legislation does not require any exposure to exchange rates between two dates, just a comparison at different times first in one currency and then in another. The exchange differences were therefore exchange losses for the purpose of s 103.
Finally, the FTT had to decide whether the exchange differences ‘fairly represented’ a loss arising to the appellants, as defined by s 84(1). The tribunal rejected HMRC’s argument that the expression required an overarching ‘sanity check’ to prevent an arithmetic difference from giving rise to a loss. The expression had been included simply for identification and/or timing purposes to identify the relevant entries. The exchange differences did therefore ‘fairly represent’ losses.
Why it matters: The FTT rejected the statement of HMRC’s witness, noting that he had sought ‘to avoid giving direct answers to questions put to him in cross examination and gave the impression, contrary to the overriding duty of an expert to help the tribunal on matters within his expertise, of seeking to argue HMRC’s case’. A seemingly biased witness can therefore prove highly detrimental. The case is also a reminder that tax legislation sometimes caters for ‘purely arithmetic’ losses.
Also reported this week:
HMRC v Sippchoice - Pensions chargeable payments and the reasonableness test
InSmith and Nephew Overseas and others v HMRC[2017] UKFTT 151 (8 February 2017), the FTT found that losses incurred as a result of a change in functional currency were allowable.
Following a change in its functional currency, from sterling to US dollars, as the result of a company reorganisation, Smith and Nephew and its two sister companies claimed foreign exchange losses totalling over $1m, arising as a result of the fall in value of the pound against the US dollar. HMRC disallowed the losses.
There were three issues. The first one was whether the appellants’ accounts complied with GAAP for the purpose of the loan relationship rules. This depended on the correct approach when accounting for a change in functional currency. The FTT was swayed by the taxpayers’ expert; and by the fact that E&Y had confirmed that the companies’ accounts gave a true and fair view.
The next issue was whether the exchange differences were ‘exchange losses’ within FA 1996 s 103. The FTT noted that an exchange loss is ‘the comparison at different times of the expression in one currency of the valuation put by the company in another currency in relation to an asset’. This is therefore an arithmetic exercise and the legislation does not require any exposure to exchange rates between two dates, just a comparison at different times first in one currency and then in another. The exchange differences were therefore exchange losses for the purpose of s 103.
Finally, the FTT had to decide whether the exchange differences ‘fairly represented’ a loss arising to the appellants, as defined by s 84(1). The tribunal rejected HMRC’s argument that the expression required an overarching ‘sanity check’ to prevent an arithmetic difference from giving rise to a loss. The expression had been included simply for identification and/or timing purposes to identify the relevant entries. The exchange differences did therefore ‘fairly represent’ losses.
Why it matters: The FTT rejected the statement of HMRC’s witness, noting that he had sought ‘to avoid giving direct answers to questions put to him in cross examination and gave the impression, contrary to the overriding duty of an expert to help the tribunal on matters within his expertise, of seeking to argue HMRC’s case’. A seemingly biased witness can therefore prove highly detrimental. The case is also a reminder that tax legislation sometimes caters for ‘purely arithmetic’ losses.
Also reported this week:
HMRC v Sippchoice - Pensions chargeable payments and the reasonableness test
