Introduction Background Note
81.Overhedging and underhedging arrangements (“risk transfer schemes”) primarily seek to exploit the tax provisions in order to achieve better returns or lower borrowing costs available where there is an exposure to a risk, such as foreign exchange, while effectively passing that exposure on to the Exchequer.
82.This is achieved by fragmenting transactions amongst different group companies to ensure that an individual company can get tax relief for a larger loss than the economic loss to the group as a whole. It is structured to ensure that the tax relief on the loss at entity-level fully offsets the economic loss to the group as a whole.
83.The purpose of these provisions is to ensure that any losses from risk transfer scheme arrangements are ring-fenced such that they can only be relieved against profits from the same risk transfer scheme. This will prevent such losses from reducing the group’s tax liabilities except to the extent that the same scheme has generated previous taxable profits.
84.The rules will apply to instruments that are treated, for tax purposes, as loan relationships or derivative contacts. There is also a regulation-making power to extend these provisions, if considered necessary, to include trading profits and losses made by certain types of business within the financial sector.