ICAEW TAX FACULTY GUIDANCE NOTE
TAXGUIDE 4/11
FOREIGN CURRENCY ISSUES
Guidance published by the Tax Faculty on 28 November 2011
Contents
Paragraph
Foreword
1-7
Who we are
8-10
Overview
11-28
Section A - Foreign currency: notes and coins
29-34
Section B – Foreign currency bank accounts
35-81
Section C – Assets bought and/or sold in a foreign currency
82- 84
Section D – Income received in a foreign currency
85-111
Section E – Mixed funds
112-118
Section F – The automatic remittance basis
119-127
HMRC technical note setting down its settled position on foreign
income received in non-sterling currency and the £2,000 threshold
Appendix 1
Support for the alternative view on foreign income received in a nonsterling currency and the £2,000 threshold
Appendix 2
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FOREIGN CURRENCY ISSUES
DETAILED CONTENTS GUIDE
Contents
Foreword
Paragraph
1-7
Who we are
8-10
Overview
11-28
Section A – Foreign currency: notes and coins
29-34
Section B – Foreign currency bank accounts
Introduction
The basic CGT computation (for 2011/12 and prior years)
The part disposal approach
Overdrawn accounts
SP10/84 and its application to UK resident domiciliaries
Determining the base cost of foreign currency bank accounts held by foreign
domiciliares
The simplified method of computation
The £500 de minimis
Practical issues when completing tax returns
Problems with information supplied by investment managers
Gifts between spouses/civil partners
The section 16ZA, TCGA 1992 election
Non-UK resident trusts
Non-UK resident companies
Section C – Assets bought and/or sold in a foreign currency
Section D – Income received in a foreign currency
The arising basis of taxation
Exchange rates for foreign tax credits
The remittance basis of taxation – HMRC’s view
The alternative view
Which view is correct?
Finance Act 2010 - modification of legislation
The section 37, TCGA 1992 issue
What to do when preparing a tax return
Practical concerns over the foreign currency income exchange rate conversion
issue
35-42
43-46
47
48
49-59
59-61
62
63-64
65-70
71-72
73-74
75
76
77-81
82-84
85
86-89
90-92
93
94-96
97-101
102-105
106-108
109-111
Section E – Mixed Funds
Introduction
Tax Faculty’s comments on CG25392
General comments on the mixed fund issue and the difference in approach
112-113
114-115
116-118
Section F – The automatic remittance basis
Introduction
Initial HMRC approach
Revised HMRC approach
The problem for practitioners
119-120
121-122
123-125
126-127
2
FOREIGN CURRENCY ISSUES
FOREWORD
1.
Over the last two years TAXline has included a number of articles which have discussed
some of the technical and practical tax issues relating to foreign currency income and capital
gains.
2.
This guidance summarises the current position and the main technical issues as we see
them. It also sets out some practical examples of the problem areas. To avoid issues with
respect to incorrect exchange rates in most of the examples the foreign currency used will be
the imaginary Utopian dollar (Ut$).
3.
It should be noted that this guidance covers the position for the current tax year (2011/12)
and prior years. In the 17 June 2011 consultation document on the Reform of the taxation of
non-domiciled individuals the government announced proposals to remove sums within
foreign currency bank accounts from the scope of capital gains tax for individuals with effect
from 2012/13.
4.
We should emphasise that this guidance is not endorsed by HMRC and in some places it
sets out views that differ from those expressed by HMRC. We highlight where this is the case
and provide details of HMRC’s view. We also indicate where examples have been agreed by
HMRC.
5.
Information about the Tax Faculty and the ICAEW is given below.
6.
This guidance builds on articles by Lynnette Bober published within TAXline during 2009 and
2010. Some of the passages within this guidance also build on work which was originally
prepared for Taxwise 2010/11. We are grateful to LexisNexis for agreeing that the material
can be used. The ICAEW holds the copyright in this TAXGUIDE and the terms on which it
may be reproduced are set out on page 27.
7.
The ICAEW and the author accept no responsibility for loss occasioned by any person acting
or refraining from action as a result of this guidance.
WHO WE ARE
8.
The Institute operates under a Royal Charter, working in the public interest. It’s regulation of
its members, in particular its responsibilities in respect of auditors, is overseen by the
Financial Reporting Council. As a world leading professional accountancy body, the Institute
provides leadership and practical support to over 136,000 members in more than 160
countries, working with governments, regulators and industry in order to ensure that the
highest standards are maintained. The Institute is a founding member of the Global
Accounting Alliance with over 775,000 members worldwide.
9.
Our members provide financial knowledge and guidance based on the highest technical and
ethical standards. They are trained to challenge people and organisations to think and act
differently, to provide clarity and vigour, and so help create and sustain prosperity. The
Institute ensures these skills are constantly developed, recognised and valued.
10. The Tax Faculty is the focus for tax within the Institute. It is responsible for technical tax
submissions on behalf of the Institute as a whole and it also provides various tax services,
including the monthly newsletter TAXline to more than 11,000 members of the Institute who
pay an additional subscription, and a free weekly newswire.
3
OVERVIEW
11. Foreign currency problems can arise for all UK resident taxpayers regardless of their
domicile. This guidance examines the UK income tax and capital gains tax implications of
transactions that involve foreign currency and in particular the complex issues that can arise
where transactions are carried out by UK resident foreign domiciliaries. There will be UK tax
issues to consider where:
• there is a disposal of foreign currency;
• there is a disposal of foreign currency within a bank account;
• all or some of the amounts with respect to the capital gains tax (CGT) disposal
computation for a chargeable asset are originally in a foreign currency; and
• income is received in a foreign currency.
12. The Finance Act 2008 (FA 2008) changes to the remittance basis rules meant that from
2008/09 onwards UK-resident foreign domiciliaries have had to consider chargeable disposal
calculations for withdrawals from foreign currency bank accounts far more than they needed
to in earlier years. There are two reasons for this.
13. The first is that for many UK-resident foreign domiciliaries, the changes mean that the
remittance basis is not going to be cost effective from 2008/09 onwards, so they will be
subject to tax on the arising basis.
14. The second is that, generally, those for whom the remittance basis is still cost effective will
not have the benefit of a CGT annual exemption. This means that a chargeable disposal
calculation has to be carried out every time there is a remittance to the UK from foreign
currency bank accounts.
15. In practice the position of foreign domiciliaries can be more difficult than that of UK
domiciliaries because:
• foreign domiciliaries are likely to have more foreign currency accounts and more transfers
between accounts denominated in the same foreign currency;
• there will often be more activity in foreign currency accounts belonging to foreign
domiciliaries, and higher transaction amounts; and
• they may not have accurate base cost details.
16. Over the last two years a series of discussions have been held with HMRC with respect to the
various problems. As a result of these discussions some practical measures have been
announced that should make it easier to satisfy the compliance requirements. There are still,
however, very significant practical problems.
17. Many of the CGT problems stem from the fact that the legislation was drafted at a time when
the UK had exchange controls. With the lifting of exchange controls, these rules no longer
provide a satisfactory basis for taxing foreign currency.
18. The Tax Faculty made representations calling for the rules to be modernised. We were
pleased to see that one of the four proposed simplifications to the remittance basis that was
announced in the June 2011 consultation document, Reform of the taxation of non-domiciled
individuals, covered foreign currency bank accounts.
19. As noted in the foreword, from 2012/13 the Government proposes to remove sums within
foreign currency bank accounts from the scope of capital gains tax for individuals.
Representations have been made by the Tax Faculty (and others) for the exemption to be
extended to trusts and related vehicles. As this TAXGUIDE shows, this is currently a very
difficult area with no agreement as to the correct treatment.
4
20. This TAXGUIDE looks at some of the technical and practical issues relating to the taxation of
foreign currency income and capital gains. The CGT legislation deals separately with foreign
currency (notes and coins) and foreign currency held within a bank account. Section A sets
out the CGT rules as they apply to foreign currency (notes and coins).
21. Section B considers the CGT rules where there is a chargeable disposal as a result of
withdrawing foreign currency from a bank account. It starts by looking at the basic CGT
computation and the part disposal rules under s 42, Taxation of Chargeable Gains Act 1992
(TCGA 1992) which are to be used for 2010/11 onwards. The section continues by looking in
detail at the particular problems faced by foreign domiciliaries who have foreign currency
bank accounts (FCBAs). It then considers some of the practical issues that advisers may
encounter when completing the tax return. The final part of the section highlights the potential
problem in inter-spouse/partner transfers, reminds the reader of the need to consider FCBAs
in the s 16ZA, TCGA 1992 capital losses election and looks at the position of non-resident
trusts and non-resident companies who hold FCBAs.
22. It is a basic rule that in order to calculate UK tax all income and gains must be expressed in
sterling. Where income is received or assets are bought or sold in a currency other than
sterling this requires translating the foreign currency amounts into sterling. It is necessary
therefore to identify a currency conversion date and ascertain the exchange rate for that date.
23. Exchange rates can be found on the HMRC website at www.hmrc.gov.uk/exrate/. Daily rates
can be found on commercial websites. It is understood that, provided a consistent approach
is adopted, HMRC will accept rates taken from any reputable website. Guidance can be found
in the HMRC manuals at BIM 39507 of the Business Income Manual and at SA4310 of the
Savings Income Manual.
24. For CGT the position is clear. There have been a number of cases on this issue and
Capcount Trading v Evans 65 TC 545 was determined by the Court of Appeal. Section C
sets out the CGT computation when assets are acquired and/or disposed of in a foreign
currency.
25. Section D looks at the taxation of income received in a foreign currency. For those taxed on
an arising basis the income tax position is clear and is set out in para 85. Where trading
income is in point the position is discussed in SP2/02 (Exchange Rate Fluctuations) and it is
felt that the same principles apply for property income.
26. A problem arises, however, where foreign income received in a foreign currency is taxable on
a remittance basis. HMRC take the view that the conversion should be at the exchange rate
on the date of remittance. The technical analysis supporting HMRC’s view is reproduced in
full in Appendix 1. The Tax Faculty take the view that the conversion to sterling should be at
the exchange rate prevailing when the income arose, support for this ‘alternative’ view is
summarised in Appendix 2. Paragraphs 90-96 examine the two approaches and their relative
merits. Section D continues by considering the requirement for a s 37, TCGA 1992
adjustment and concludes by offering guidance on what to do when preparing a tax return
and considers some of the practical concerns on the timing of remittances.
27. This same problem can arise when considering the exchange rate to use for remittances of
income from a foreign currency mixed fund. This issue is discussed in Section E.
28. Section F looks at the method for calculating the aggregate unremitted income and gains for
those who qualify for the automatic remittance basis under s 809D, Income Tax Act 2007 (ITA
2007).
5
SECTION A - FOREIGN CURRENCY: NOTES AND COINS
29. The CGT legislation deals separately with foreign currency (notes and coins) and foreign
currency within a bank account.
30. Any use of foreign currency can potentially give rise to a chargeable disposal, this means any
disposal of foreign currency whether:
• to spend the funds;
• to convert the currency to a different currency; or
• to pay the funds into a bank account even if the account is denominated in the same
currency.
31. The general rule is that foreign currency is a chargeable asset (s 21(1)(b), TCGA 1992). This
means that any disposal, or deemed disposal, of foreign currency will give rise to a disposal
or a part disposal.
32. There is a specific exemption at s 269, TCGA 1992 for foreign currency for personal
expenditure. For the exemption to be in point the following conditions must be met:
• the currency was acquired by the individual; and
• the reason for the acquisition was so the currency could be used for the personal
expenditure outside the UK of either the individual or the individual’s family or dependants
(including expenditure on the provision or maintenance of any residence outside the UK).
33. The terms of this exemption are the same as for s 252(2), TCGA 1992. See the comments in
para 40 below for HMRC’s strict interpretation of these terms.
34. Notes and coins in the same currency are fungible assets and are subject to the pooling rules
in ss 104–114, TCGA 1992. FA 2008 modified the identification rules as they apply to
individuals, trustees and personal representatives. For disposals from 2008/09 onwards, for
the purposes of arriving at the base cost when a disposal has taken place, for each single
asset class there is deemed to be one single cost pool (although s 106A, TCGA 1992
provides that the same day and the next 30 days matching rules take precedence).
SECTION B – FOREIGN CURRENCY BANK ACCOUNTS
Introduction
35. A withdrawal of foreign currency from a bank account can potentially give rise to a chargeable
disposal, whether it is:
• to spend the funds (either through a cash withdrawal, a cheque, a debit card transaction or
a credit transfer);
• to convert foreign currency to a different foreign currency or to sterling;
• to make a transfer between one account to another account denominated in the same
foreign currency (though SP10/84 may assist here see paras 49-58 below).
36. Individuals can therefore crystallise disposals both where they withdraw funds from a FCBA
and when they spend the funds and/or convert the funds to sterling.
37. A UK resident foreign domiciliary who is a remittance basis user will only be subject to tax on
foreign chargeable gains if there is a remittance to the UK (defined by s 809L, ITA 2007).
However, where funds have been remitted one will have to trace through all chargeable
disposals to establish the appropriate base cost to use for the remitted gain. Further, where a
6
remittance basis claim has been made, there is no CGT annual exemption so CGT
calculations will be required even though the tax at stake may not be significant.
38. As noted in paras 49-58, the discussions with HMRC led to guidance providing some practical
solutions to the technical problems of calculating gains where there are withdrawals from
foreign currency bank accounts. The compliance task, however, remains onerous for both the
taxpayer and any HMRC officer reviewing the tax return.
39. Legally, foreign currency within a bank account is a debt owed by the bank to the individual
who deposited the funds. The general rule (s 251, TCGA 1992) is that such a debt (not being
a debt on a security) would not be a chargeable asset for CGT purposes. However, s 252,
TCGA 1992 specifically overrides this rule for foreign currency bank accounts (though not for
any other foreign currency debts such as funds within a broker's account). The position is
different for broker’s accounts where legally the position is that the fund manager has funds of
the client under management. The tax analysis will depend on the way the funds are held with
the fund manager being seen as the nominee/bare trustee of the client. If the funds are held
in a bank account (typically through a client account arrangement) then it is suggested that
there would be CGT issues.
40. There is an exemption at s 252(2) TCGA 1992 for sums within the bank account which are for
personal use. The terms of the exemption are the same as that in s 269, TCGA 1992, see
para 32 above. The conditions are strict. HMRC interpret them to mean that where an
individual receives a credit (or makes a deposit) into a foreign currency bank account as a
result of receiving income (such as remuneration from an employment, profits from an
unincorporated business, interest and dividend income) the future withdrawal of that foreign
currency (for CGT purposes the disposal of the bank debt) is outside the scope of the
exemption.
41. Commentators have suggested that HMRC interpretations of these exemptions could be too
narrow. This is particularly the case with respect to employment income where it could be
argued that the reason the individual worked was to obtain funds to be able to pay for non-UK
personal expenditure. It has been suggested that the relief should apply if an individual
receives foreign currency income which is paid into a designated personal expenditure
abroad account.
42. Where the individual is taxed on the remittance basis and remittance basis income and/or
gains are used the exemption is not an issue, as using the funds for non-UK personal
expenditure would not result in a UK tax liability.
The basic CGT computation (for 2011/12 and prior years)
43. The new pages of the HMRC Residence Domicile and Remittances Manual (RDRM), issued
in August 2009, specify that the part disposal rules in s 42, TCGA 1992 (part disposal
provisions) should be used to compute gains and losses on withdrawals from foreign currency
bank accounts. Prior to this the guidance in the HMRC Capital Gains Manual, at paragraph
CG78332, stated that the share matching rules should be used to establish gains and losses
on disposals from foreign currency bank accounts.
44. We appreciate the technical basis behind HMRC’s change of view but it gave rise to practical
concerns given that many practitioners had followed the Capital Gains Manual guidance.
HMRC accepted that any 2008/09 returns already submitted that had used the share
matching rules did not have to be amended as a result of this change of view. Furthermore,
where using the part disposal rules would cause practical difficulty for 2008/09, HMRC also
accepted that the change to using the part disposal rules could be delayed (see the relevant
section of the HMRC guidance at www.hmrc.gov.uk/cnr/remittance-basis.htm).
7
45. HMRC’s Capital Gains Manual refers to the position for 2009/10 and 2010/11 at CG78332A.
HMRC expect the part disposal approach to be followed for 2010/11 onwards. However, for
2009/10, given the issues with the HMRC guidance (which was revised part way through the
tax year), HMRC accept that the share identification rules may be used providing:
• the rules are applied consistently throughout the year in question and in all preceding
years;
• it is not a practical proposition for computations to be prepared on the correct basis, or the
taxpayer acted on the earlier understanding that HMRC considered that the share
identification rules apply; and
• for 2008/09 and 2009/10 the revised share identification rules introduced by FA 2008 are
used.
46. Where the share identification rules are used for 2009/10 this should be made clear in the
additional information section of the capital gains tax supplementary pages of the tax return.
The part disposal approach
47. For a foreign exchange disposal the values of A and B, in the CGT part disposal formula in s
42, TCGA 1992, are calculated by converting the foreign currency amount into sterling using
the same exchange rate. One can also arrive at the correct base cost by using the following
formula:
BC = TAC x (WFC/TFC)
Where BC = base cost, TAC = total allowable cost, WFC = withdrawn foreign currency and
TFC = total foreign currency immediately before the withdrawal is made.
Example 1
Yulia withdrew Ut$500,000 from her Jersey deposit account on 25 October 2011. On the date of
the withdrawal the exchange rate was Ut$1 = £0.6135. Immediately before the withdrawal the
account broke down as follows:
13 April 2010
17 May 2010
28 July 2010
24 December 2010
17 March 2011
28 August 2011
Ut$
Utopian Dollars
to GBP
Base Cost
£
1,000,000
500,000
100,000
400,000
75,000
250,000
2,325,000
1.96850
1.94970
1.99124
1.48038
1.40626
1,62180
508,000
256,450
50,220
270,200
53,333
154,150
1,292,353
The long hand method:
A=
A+B
=
Base cost =
(Ut$500,000 x 0.6135)
(Ut$2,325,000 X 0.6135)
(£306,750/£1,426,388) x £1,292,353
= £306,750
= £1,426,388
= £277,925
The short cut: BC = TAC x (WFC/TFC)
TAC = £1,292,353
WFC = 500,000
TFC = 2,325,000
Base cost
= (£1,292,353 x (500,000/2,325,000) = £277,925
8
£
Consideration
Base cost
Chargeable gain
306,750
277,925
28,825
Overdrawn accounts
48. Foreign currency within a bank account is different to other chargeable assets as an account
can fluctuate between having funds and being in overdraft. It is understood to be HMRC‘s
view (see CG78333 of the HMRC Capital Gains Manual) that the asset represented by a
credit balance is wholly disposed of and ceases to exist should that balance become zero or
negative.
Example 2 (Agreed with HMRC)
Carla opened a Utopian dollar current account on 29 August 2011 with a deposit of Ut$7,500. She
had an overdraft facility of Ut$5,000. The following entries went through the account:
Date
29 August 2011
2 September 2011
Narrative
Deposit
Withdrawal
11 September
2011
28 September
2011
1 October 2011
28 October 2011
2 November 2011
Withdrawal
Amount
Balance
Chargeable disposal
Ut$7,500
Ut$7,500
Not applicable – deposit
Ut$(8,900) Ut$(1,400) Of the Ut$7,500 that takes the
account down to a nil balance.
Ut$2,800
Ut$(4,200) No disposal – overdraft
Deposit
Ut$4,000
Ut$(200)
Withdrawal
Deposit
Withdrawal
Ut$4,750
Ut$7,500
Ut$3,900
Ut$(4,950) No disposal – overdraft
Ut$2,550
Not applicable – deposit
Ut$(1,350) Of the Ut$2,550 that takes the
account down to a nil balance.
Not applicable – deposit
The CGT computation with respect to 2 September 2011 disposal:
29 August 2011 Ut$1 = £0.54520
2 September 2011 Ut$1 = £0.55410
Consideration
Base cost
Chargeable gain
Sterling
7,500 x
0.55410
7,500 x
0.54520
£
4,156
4,089
67
SP10/84 (Foreign bank accounts) and its application to UK resident foreign domiciliaries
49. A bank account with one financial institution is a separate asset to an account with another
institution, even if it is denominated in the same currency. It is accepted that, strictly, a
transfer from a Euro account with Bank 1 to a Euro account with Bank 2 will result in a
disposal and an acquisition. The more contentious question is whether there is a disposal
where the transfer is between accounts with the same financial institution and the accounts
are denominated in the same currency.
50. HMRC’s published view is that for CGT purposes each bank account is a separate
chargeable asset, and it follows that transfers between bank accounts denominated in the
same currency which are held with the same financial institution will result in a chargeable
disposal. Accordingly, something as routine as a sweep facility between a deposit account
9
and a current account will be a chargeable disposal. Where a client has foreign investments
or earned income the potential for a significant number of chargeable disposals is high.
51. HMRC published SP10/84 to provide a practical solution to this problem. Under SP10/84,
HMRC allows taxpayers to treat all bank accounts denominated in the same foreign currency
as a single asset for the purposes of considering whether there has been a chargeable
disposal of a sum of foreign currency within the account. For tax years up to and including
2007/08, however, SP10/84 does not apply to foreign domiciliaries transferring same
currency funds to and from non-UK accounts (note the operation of SP10/84 is linked to
domicile not whether the individual is a remittance basis user).
52. There were calls to extend SP10/84 to foreign domiciliaries following the FA 2008 changes
which were resisted initially by HMRC (see the relevant section of the HMRC guidance at
www.hmrc.gov.uk/cnr/remittance-basis.htm). In the last week of January 2010, HMRC
announced (see www.hmrc.gov.uk/cnr/cgt-transfers-fc.htm) that it had decided to extend SP
10/84 to UK resident foreign domiciliaries (though not to put them on a par with the position
for UK domiciliaries). The extension means that for transfers taking place in 2008/09 and
onwards an individual who is not domiciled in the United Kingdom may, for the purposes of
determining whether a chargeable disposal has been made, treat as one account all bank
accounts which:
• are in the individual’s name;
• are in a particular foreign currency; and
• are not situated in the UK for the purposes of TCGA 1992 and are, therefore, not within the
scope of SP10/84.
53. For chargeable disposal purposes, the taxpayer may thus disregard direct transfers among
such same currency non-UK bank accounts. Once adopted the practice must be applied to all
future direct transfers among those bank accounts.
54. Thus a UK resident foreign domiciliary who applies SP10/84 will have all UK situs accounts in
the same currency viewed as one ‘aggregated account’ and all offshore situs accounts in the
same currency viewed as one ‘aggregated account’. Transfers between different ‘aggregated
accounts’ will be chargeable disposals whether they are:
• between a same currency UK situs account and a non-UK situs account;
• between UK situs accounts in different currencies; or
• between non-UK situs accounts in different currencies.
55. Given the way SP10/84 applies to foreign domiciliaries a foreign domiciliary could choose to
use SP10/84 just for UK accounts in a particular foreign currency or just for foreign accounts
in a particular foreign currency. Once it is decided to adopt SP10/84 for either the UK or
offshore accounts in a particular currency that decision can only be revisited:
• for the UK accounts in the particular currency if all the UK accounts in that currency are
cleared down so that no debt is owed to the taxpayer; and
• for the offshore accounts in the particular currency if all the offshore accounts in that
currency are cleared down so that no debt is owed to the taxpayer.
56. SP10/84 only applies to transfers between bank accounts; it does not cover transfers
between bank accounts and brokerage accounts or transfers of foreign currency from a bank
account to repay a foreign currency loan.
10
Example 3
Louis is a UK resident foreign domiciliary. He has two Euro accounts in London, two in France and
three in Switzerland. Prior to 6 April 2008, by applying SP10/84, Louis was able to treat the two
UK-based accounts as a single account, but the non-UK accounts had to be treated as separate
assets in their own right. Under the extended SP10/84 from 6 April 2008, Louis may continue to
treat his two UK-based accounts as one account and may treat his five non-UK accounts as a
different single account so that direct transfers between the UK Euro accounts will be disregarded
and direct transfers between the non-UK accounts will also be disregarded. However, transfers
from the French or Swiss accounts to one of the London accounts, or to any other account not
denominated in Euros, will be a disposal for capital gains tax purposes as will any withdrawals from
the account other than transfers between bank accounts.
Example 4
Hilary is domiciled in Illinois but is resident in the UK and has the following bank accounts:
Euro accounts in London (2), the Channel Islands (2) and Switzerland (2); and
US dollar accounts in London (3), the US (5), Switzerland (3) and Channel Islands (2)
In addition periodically both her funds in Switzerland go on same currency fiduciary deposit for
periods of between one and three months.
Prior to 6 April 2008, by applying SP10/84, Hilary was able to treat the two UK-based Euro
accounts as a single account and the three UK-based dollar accounts as a single account. Each
non-UK account had to be treated as a separate asset in its own right.
From 6 April 2008, by applying SP10/84 as well as being able to treat all UK based accounts in the
same currency as one account, Hilary may treat all non-UK based accounts in the same currency
as one account. That is rather than each account representing a separate asset, she can choose
to perform capital gains tax calculations as if she holds four distinct ‘aggregated accounts’
comprised as follows:
• the two UK situs Euro accounts;
• the three UK situs dollar accounts;
• the four non-UK situs Euro accounts (that is the two Channel Islands accounts and the two
Swiss accounts) and the periodic fiduciary deposit accounts; and
• the ten non-UK situs accounts (that is the five US accounts, the three Swiss accounts and
the two Channel Islands accounts) and the periodic fiduciary deposit accounts.
57. The extension to SP10/84 only applies to transfers between bank accounts effected in
2008/09 or later years. Where, for example, a withdrawal and remittance to the UK from a
non-sterling and non-UK account occurs on 17 June 2010 the SP10/84 extension cannot be
applied so as to disregard all transfers between same currency bank accounts prior to 6 April
2008. However, the individual could, to ease the compliance burden, opt to determine the 6
April 2008 base cost using the averaging method, see para 60 above, with the SP10/84
extension applying from 6 April 2008 onwards.
58. The effect of the extension of SP10/84 is to allow two or more foreign currency bank accounts
to be treated as a single account solely for the purposes of CGT. So where a UK resident
foreign domiciliary chooses to apply SP10/84 to transfers between same currency bank
accounts this is not an election for various same currency foreign bank accounts to be seen
as the same asset for any other purposes (such as the mixed fund rules).
11
Determining the base cost of foreign currency bank accounts held by foreign domiciliaries
59. For 2007/08 and prior tax years use of the share matching rules, together with the availability
of the CGT annual exemption will have meant that many UK resident foreign domiciliaries did
not need to have full details with respect to the base cost of the currency within their foreign
offshore bank accounts. For these foreign domiciliaries there may be difficulties in calculating
the base cost of FCBAs at 6 April 2008. The necessary records may not have been available
at 6 April 2008, or the work involved in establishing the base cost may be unduly onerous.
60. For 2008/09 and later tax years HMRC has agreed to accept computations where the base
cost of foreign currency within a bank account at 6 April 2008 is calculated by means of an
average exchange rate over a period of time up to April 2008. Note this practice is only
available to UK resident foreign domiciliaries. For the full text of the HMRC guidance see the
relevant section of the HMRC guidance at www.hmrc.gov.uk/cnr/remittance-basis.htm, the
key parts are as follows:
‘Under this method, individuals can establish the base or acquisition cost of their non-sterling
bank accounts by reference to the average foreign currency exchange rates which were in
force over the six years up to April 2008. These rates can be found on the HMRC website at
http://www.hmrc.gov.uk/exrate/index.htm.
Where such an account has been established for less than six years at 6 April 2008, HMRC
will permit individuals to calculate the base or acquisition cost by reference to the average
exchange rates in force over the number of years, to the nearest year, that the account has
been established.
This simplified averaging approach is entirely optional: individuals can still calculate base or
acquisition costs by using the actual exchange rates which were in force at the date on which
the currency was deposited into the bank account in question. However, any approach will
always need to be followed on a consistent basis.’
61. The following example has been agreed by HMRC and illustrates how the averaging method
is applied.
Example 5 (agreed with HMRC)
Part A
Joyce Non-Dom is a UK resident foreign domiciliary with a number of non-UK foreign currency
bank accounts. She has been UK resident from 5 July 2004. In 2010/11 she made remittances for
the first time from her non-UK foreign currency accounts. Given the heightened complexity she
used the services of a tax adviser for the first time in 2010/11 and it became apparent that there
was a significant problem as no base cost records had been kept with respect to the foreign
currency accounts. A schedule of movements on the accounts since 6 April 2008 could be
compiled but going back beyond then would involve significant work and the information was not
available to go back as far as would be necessary to arrive at accurate base costs. It was decided
to use the averaging method to arrive at an acceptable base cost for the funds within the accounts
as at 6 April 2008 and to go forward from that point.
As at 6 April 2008 she had two US dollar bank accounts held abroad (a current and a deposit
account). The closing balance on 5 April 2008 on the current account was $6,345 and on the
deposit account $112,356. She is not sure exactly when these accounts were opened but her
recollection is that they date back to when she was eleven (tax year 1993/94). Using the averaging
method what will her base cost be at 6 April 2008?
12
Analysis
To arrive at an estimated base cost for use for CGT purposes the balances on the two accounts at
the start of 6 April 2008 need to be translated to sterling using the average foreign exchange rate.
The account has been opened for in excess of six years so in line with the HMRC announcement
we use the average exchange rate for the six years to April 2008.
The average exchange rate for the six years to April 2008 for US dollars is US$1 = £0.560275917
(as per the HMRC announcement quoted above). Applying this average rate to the balance in
Joyce’s bank accounts as at the start of 6 April 2008 her base costs are as follows:
Account $
Balance
Current
Deposit
Average fx
£ Base
Cost
$6,345
0.560275917 £3,555
$112,356 0.560275917 £62,950
Part B
As at 6 April 2008 she also had two Euro bank accounts held abroad (a current and a deposit
account). The closing balance on 5 April 2008 on the current account was €5,075 and on the
deposit account €117,105. The accounts were opened in July 2004. Using the averaging method
what will her base cost be at 6 April 2008?
Analysis
To arrive at an estimated base cost for use for CGT purposes the balances on the two accounts at
the start of 6 April 2008 need to be translated to sterling using the average foreign exchange rate.
The average exchange rate is computed by averaging the HMRC average exchange rates for the
tax years from 2004/05 to 2007/08 (inclusive).
HMRC average rates for the relevant tax years:
Average for the year to
Sterling
value of
currency
31 March 2008
31 March 2007
31 March 2006
31 March 2005
0.70532
0.6779661
0.681956
0.68166326
2.74690536
Average of the average FX
rates
0.68672634
Applying this average rate to the balance in Joyce’s bank accounts as at 6 April 2008:
Account $
Balance
Current
Deposit
Average fx
£ Base
Cost
€5,075
0.68672634 £3,485
€117,105 0.68672634 £80,419
13
The simplified monthly method of computation
62. HMRC accept that there could be many transactions on a foreign currency bank account in a
tax year. Providing it is followed consistently and produces a reasonable overall result, a
simplified method of computation will be allowed when computing foreign exchange gains and
losses on withdrawals from accounts denominated in a currency other than sterling. Details
are provided in the HMRC Capital Gains Manual with narrative at CG78333 and a worked
example at CG78333A.
The £500 de minimis
63. In January 2010, HMRC announced (see the relevant section within
www.hmrc.gov.uk/cnr/res-dom-tax-amends.htm) the following additional measure to ease the
compliance burden for remittance basis users:
‘HMRC recognise that an individual's CGT liability in respect of the gains and losses arising
on such accounts may be limited, but the cost of establishing the liability may be high, for
instance where there are many transactions to take into account. In these circumstances,
where the amount of net gains from transfers from overseas non-sterling bank accounts
which an individual remits to the UK is less than £500 in any tax year in which they are taxed
on the remittance basis, they will not be required to report such gains on their tax returns.
This practice will apply for 2008-09 and subsequent tax years.’
64. Given the need to calculate net gains and the low level of the de minimis its usefulness will be
limited, but HMRC’s acknowledgement of the problems was welcome.
Practical issues when completing tax returns
65. There may be cases where it is impossible in the timeframe, or within the fee budget, to carry
out the necessary calculations to arrive at the correct position with respect to foreign currency
gains. Where it appears that the amount of tax at stake is insignificant, and likely to be less
than the professional time that it would take to ascertain the correct answer, a pragmatic
solution that will arrive at a reasonable figure could be utilised. Full disclosure is required and
the client should be made aware that HMRC might enquire and insist on the full calculations
being carried out.
66. Where assumptions are made in the preparation of a tax return, and the assumptions are
made carelessly, there will be penalties if, as a result of this carelessness, the return
understates the tax due (in addition to interest which is due if tax is understated irrespective
of whether there has been carelessness). It is, therefore, important to document why it is felt
that the approach taken is reasonable so that, should there be an HMRC enquiry into the tax
return, it would be possible to demonstrate that reasonable care was taken.
67. The following wording could be used for the white space where the UK resident foreign
domiciliary is taxed on the arising basis in the relevant tax year or comes within s 809D, ITA
2007 such that the annual exemption is available:
‘I have foreign bank accounts denominated in a foreign currency. For the purposes of this
return I have assumed that any gains or losses on such accounts balance out or are within
my unused annual exemption and consequently gains or losses have not been calculated.
Having reviewed the transactions that took place in the year this assumption appears
reasonable to me.’
or where the bank statements have been reviewed:
‘I have foreign bank accounts denominated in aforeign currency. Having had my tax agent
review the relevant statements the total amount of aggregate foreign currency capital gains
14
proceeds does not exceed £X and so I believe that it is reasonable to assume that any gains
or losses on such accounts balance out or are within my unused annual exemption.
Consequently foreign currency gains or losses in the year have not been calculated.’
68. Where the remittance basis has been claimed the annual exemption will not be available.
Gains will not, however have to be disclosed where the £500 net gains de minimis
concession applies (see para 63 above). Where it is thought the concession should apply, but
detailed work has not been carried out, the white space note suggested above could be
adapted as follows:
‘I have foreign bank accounts denominated in a foreign currency. For the purposes of this
return I have assumed that any gains or losses on these accounts balance out or are within
the £500 net gains de minimis and consequently gains or losses have not been calculated.
Having reviewed the transactions that took place in the year this assumption appears
reasonable to me.’
or where the bank statements have been reviewed:
‘I have foreign bank accounts denominated in a foreign currency. Having had my tax agent
review the relevant statements the total amount of aggregate foreign currency capital gains
proceeds does not exceed £X and so I believe that it is reasonable to assume that any gains
or losses on such accounts balance out or are within the £500 net gains de minimis.
Consequently foreign currency gains or losses in the year have not been calculated.’
69. Where a pragmatic solution has been employed the disclosure will need to be tailored to the
situation. Where one or more of the pragmatic solutions endorsed by HMRC (and discussed
above) have been used this should be stated.
70. It is important to explain to a client who does not want to incur the fees required for you to
review the bank statements that without seeing the statements you are not in a position to
assess whether or not it is reasonable to proceed on the basis that there are no gains to
report on their tax return. In such a situation the client would have to judge whether or not this
is reasonable and in the event of an HMRC enquiry finding that there has been a tax
underpayment in order to avoid penalties (in addition to the interest that would be due
regardless) would need to be able to demonstrate that he or she had taken reasonable care
when making the assumption.
Problem with information supplied by investment managers
71. We are aware of there being problems in obtaining the necessary information where
investment managers use several currencies and neither calculate the currency gains or
losses on changes of investments nor provide sufficient information for the taxpayer to be
able to calculate the gains and losses. There are also problems with some of the more
unconventional investments where reports from investment managers only provide the
foreign currency gain, with no information available about acquisition costs or sales proceeds
to enable the appropriate CGT computation to be completed.
72. Where there are problems with the information provided, and it is not possible to complete the
return in strict accordance with UK tax principles, we would suggest that appropriate white
space disclosure is providing setting down the basis on which the figures had to be prepared
given the lack of information.
Gifts between spouses/civil partners
73. There is a possible trap where gifts are made between spouses/civil partners where the gift is
effected through a transfer from a foreign currency bank account. There is no restriction on s
58, TCGA 1992 to only apply where there is a disposal of an entire asset. As such it can
15
apply regardless of whether the transfer to the spouse/civil partner is a partial disposal of an
asset or the transfer of the entire asset. This means that s 58, TCGA 1992 applies if (i) the
actual account in the donor spouse/civil partner’s name is changed into the name of the
donee spouse/civil partner; or (ii) if the account holders are changed so that it is now an
account in joint names.
74. The concern is that the nil gain/nil loss transfer rule may not apply where there is a transfer of
foreign currency from the donor’s account to the donee’s account because it can be said that
the donee spouse/civil partner does not receive the chargeable asset disposed of by the
donor spouse/civil partner (as the transfer is not of the debt owned by the bank to the
transferor spouse/civil partner). It seems unlikely that Parliament intended for s 58, TCGA
1992 to be denied in such cases and one would hope that both HMRC and (if necessary) the
Courts would take a purposive approach when construing the legislation such that the
transfer is accepted as falling within the s 58, TCGA 1992 no gain and no loss provisions.
Interpreted literally, however, s 58, TCGA 1992 would not apply and given the uncertainty in
this area clarifying legislation to make it clear s 58, TCGA 1992 can apply in such cases is
desirable and we will be making representations for such a change.
The section 16ZA, TCGA 1992 capital losses election
75. Where a remittance basis claim is made the taxpayer has to decide whether or not to make
the s 16ZA, TCGA 1992 election to have their foreign losses treated as allowable losses. In
determining whether the taxpayer’s situation is such that making the election is desirable, it is
important that one does not forget about transactions with respect to foreign currency and
foreign currency bank accounts.
Non-UK resident trusts
76. Where s 86, TCGA 1992 (for settlor-interested trusts where the settlor is UK domiciled) or s
87, TCGA 1992 are in point all of the above problems apply to non-resident trusts with funds
in currencies other than pounds sterling. Unfortunately, despite the reference to ‘a taxpayer’
in SP10/84, HMRC has stated (in response to queries we submitted) that, in its view,
SP10/84 only applies to individuals. This is a significant concern.
Non-UK resident companies
77. Section 13, TCGA 1992 can attribute a gain realised on the disposal of chargeable assets.
The question is, therefore, whether for the purposes of s 13, TCGA 1992 foreign currency is a
chargeable asset.
78. Since 1998 for CGT purposes there have been two distinct sets of rules with respect to
chargeable disposals: one set for individuals, trustees and personal representatives (where
as explained above disposals of foreign currency are classified as chargeable disposals) and
one set for corporate entitles.
79. Section 13(11A), TCGA 1992 was inserted by FA 1998 and specifies that for disposals
effected on or after 6 April 1998 for the purposes of s 13, TCGA 1992 one uses the rules that
apply to companies subject to UK corporation tax. For UK resident companies the loan
relationship rules mean that foreign currency gains and losses are not within the CGT regime
(under the rewritten legislation the legislative references to support this conclusion are s 295,
s 328 and s 464, Corporation Tax Act 2009). Therefore s 13, TCGA 1992 cannot attribute
foreign currency gains.
80. We are aware that in this context s 13(5)(c), TCGA 1992 causes confusion. The fact that the
sub-section specifically disapplies the attribution mechanism for foreign currency held for
trading purposes has been cited as meaning that s 13 must in general apply to foreign
16
currency. This overlooks the unequivocal nature of s 13(11A), TCGA 1992 and that s 13(5)(c)
predates the FA 1998 insertion of s 13(11A). In effect since the FA 1998 amendment s
13(5)(c) has been superfluous.
81. There may be concern that, as the s 13, TCGA 1992 provisions do not result in a foreign
currency gain being attributed to participators, the transfer of assets abroad provisions will
attribute a gain. Income for the purposes of the transfer of assets abroad legislation is
deemed to arise in accordance with the normal income tax rules (see Lord Chetwode v Inland
Revenue Commissioners [1977] STC 64). Therefore foreign currency gains would not be
attributed under this legislation as in a non-trading situation the income tax provisions do not
apply to tax appreciation in foreign currency.
SECTION C – ASSETS BOUGHT AND /OR SOLD IN A FOREIGN CURRENCY
82. For UK tax purposes, CGT computations must always be computed in sterling. Where foreign
currency is involved the sales proceeds, costs of acquisition, enhancement costs and any
incidental expenses must be translated into sterling at the exchange rate prevailing on the
appropriate date.
83. Authority for the above comes from Bentley v Pike [1981] STC 360 and the Court of Appeal
case of Capcount Trading v Evans 65 TC 545.
84. It is accepted that this approach is used regardless of where the individual is domiciled or
whether they are taxed on the arising or remittance basis in the tax year of the disposal.
Example 6
Jasper Non-Dom is a UK resident foreign domiciliary in 2010/11 and will make a remittance basis
claim for that year. He came to the UK for the first time in 2004/05. Prior to coming to the UK he
had acquired a holding in Wow Ltd a Utopian company. He paid 150,000 Utopian dollars (Ut$) for
the holding at a time when 1 Ut$ was equivalent to £1.5.
Jasper sold his entire holding in Wow Ltd on 21 April 2010 for Ut$750,000. At this time Ut$1 was
worth £1.4. The Ut$ proceeds were paid into a specially opened bank account with interest being
paid into a separate account.
Jasper transferred the entire Ut$750,000 to his UK account on 21 June 2010. On this date Ut$1
was equivalent to £1.43. What are the tax consequences of the remittance?
ANALYSIS
The Ut$750,000 that Jasper remitted on 21 June 2010 represents 2010/11 remittance basis foreign
chargeable gains (the gain on the shares and the currency gain with respect to the period the
proceeds were in the Utopian bank account) and pre 6 April 2008 clean capital.
Foreign chargeable gain on the disposal of the Wow Ltd shares:
Proceeds
Base cost
Chargeable
gain
Utopian $
Foreign Exchange rate
Ut$ to £
Pounds Sterling
£
750,000
150,000
1:1.4
1:1.5
1,050,000
(225,000)
825,000
Foreign chargeable gain on the disposal of the Ut$750,000 debt (the transfer to the UK strictly
representing the disposal of the debt owed to Jasper by his bank):
Utopian $
Foreign Exchange rate
Pounds Sterling
17
Proceeds
Base cost
Chargeable
gain
750,000
750,000
Ut$ to £
£
1:1.43
1:1.4
1,072,500
(1,050,000)
22,500
The transfer to Jasper’s UK bank account results in foreign chargeable gains of £847,500 being
remitted (that is £825,000 resulting from the disposal of the shares and £22,500 arising on the
closure of the Ut$ bank account). The two gains are remitted together before 22 June 2010
meaning that both are taxed at 18%.
SECTION D – INCOME RECEIVED IN A FOREIGN CURRENCY
Introduction
The arising basis of taxation
85. Foreign domiciliaries who are taxed on the arising basis will be subject to income tax on
foreign income arising in the tax year in the same way as any other UK taxpayer. The
applicable foreign exchange rate will be that on the date the income arises, or the average
rate for the year where the income arises frequently throughout the year (eg dividend and
interest income). HMRC has confirmed that although the guidance in the RDRM only refers to
the foreign exchange rate on the date that the income arises, this should not be construed to
mean that they will not accept the use of the average rate where appropriate (the exchange
rate used should be disclosed in the additional information section of the relevant tax return
supplementary pages).
Exchange rates for foreign tax credits
86. HMRC states in the International Manual (INTM162160) that the tax credit relief for foreign
tax is converted into sterling at the date the foreign tax is payable. We put the following
example to HMRC for their comments.
Example 7
Chloe Non Dom is a UK resident foreign domiciliary. She received a Utopian dollar dividend on 17
May 2011 of Ut$148,750 with Ut$26,250 having been withheld (in accordance with the DTC). Her
gross dividend is thus Ut$175,000. She remits the entire Ut$148,750 on 16 June 2011.
What sterling amount is Chloe deemed to have remitted and what is the sterling tax credit she is
entitled to if:
• on 17 May 2011 the exchange rate is £1 = Ut$0.61 and on 16 June 2011 the exchange rate
is £1 = Ut$0.71; or
• on 17 May 2011 the exchange rate is £1 = Ut$0.71 and on 16 June 2011 the exchange rate
is £1 = Ut$0.61
HMRC commentary
As stated in HMRC’s guidance in the International Manual (INTM162160), the tax credit relief or
foreign tax is converted into sterling at the date the foreign tax is payable:
For the purpose of computing tax credit relief, foreign tax, payable directly or by deduction, should
be converted into sterling at the rate of exchange obtaining on the date when the foreign tax for
which credit is to be allowed becomes payable.
This is also in line with the principle from Greig v Ashton [36TC581 1956].
18
In the example above, assume that the payable date for the Ut$26,250 foreign tax withheld at
source is 17 May 2011 and that this is the minimum foreign tax payable under the DTA.
In scenario (a), Chloe remits cash of Ut$148,750 on 16 June 2011.
The Ut$148,750 is grossed up to Ut$175,000 and is translated into sterling using the exchange
rate on the date of remittance (£1 = Ut$0.71) = £246,478.
Chloe claims Foreign Tax Credit Relief, and assuming a UK tax rate of 40% on this income,
Chloe’s UK tax liability is:
40% x
£246,478
Less FTCR (Ut$26,250 / 0.61)
Net UK liability
= £98,591
= (£43,033)
= £55,558
In scenario (b), Chloe remits cash of Ut$148,750 on 16 June 2011.
The Ut$148,750 is grossed up to Ut$175,000 and is translated into sterling using the exchange
rate on the date of remittance (£1 = 0.61) = £286,885
Chloe claims Foreign Tax Credit Relief, and assuming a UK tax rate of 40% on this income,
Chloe’s UK tax liability is:
40% x
£286,885
Less FTCR (Ut$26,250 / 0.71)
Net UK liability
= £114,754
= (£36,971)
= £77,783
87. In the above example the Tax Faculty accept the view set down in HMRC guidance with
respect to the rate of exchange to use for the foreign tax credit. We do not agree, however,
that the income should be grossed up using the rate of exchange on the date of remittance,
as HMRC have done in this example.
88. Where there is withholding tax the amount remitted is always taken as the net amount.
Moving on from this accepted fact we suggest that the following steps should be followed
where there is a situation involving a foreign currency tax credit.
Step 1: determining the gross income figure
The foreign currency amount remitted should be grossed up in line with the actual tax paid to
the source state to determine the gross foreign income amount to convert to sterling. We
believe (for the reasons set down in para 93 and Appendix 2) that this income amount should
then be converted to sterling using the rate of exchange on the date that the income arises. It
is this sterling amount that is subject to UK tax and one then moves on to calculate the
available foreign tax credit.
Step 2: determining the allowable foreign tax credit
The foreign tax credit available has to be in accordance with the terms of any double tax
convention – for example if 35% withholding tax was deducted at source but the treaty only
allows the source state to deduct 15% the foreign tax credit is restricted to 15% of the gross
amount. The available foreign tax credit is calculated in the original foreign currency. Once
the available foreign currency tax credit has been determined taking into account any treaty
restriction, this figure is converted into sterling using the exchange rate at the time that the
foreign tax credit is treated as paid (that is when it is deducted). In most cases the date the
foreign tax credit is treated as paid will be taken to be the same time as when the income
arises so the same exchange rate as in step 1 will be used.
19
89. We believe that the approach above is the better view as it is more in keeping with the
general scheme of the legislation and the case law authority in this area.
The remittance basis of taxation- HMRC’s view
90. HMRC’s view is that where a non-domiciled individual is taxable on the remittance basis and
that individual withdraws funds from an FCBA situated outside the UK the whole, or part, of
the amount withdrawn represents foreign income taxable on the remittance basis. The foreign
income transferred will be liable to income tax at the time of remittance and the amount on
which income tax is due is the sterling value of the income at the time it is remitted.
91. The withdrawal of funds, however, also represents a chargeable disposal of the whole, or part
of, the FCBA for CGT purposes, the deemed consideration being the sterling equivalent of
the amount withdrawn. From 16 December 2009 HMRC has stated that s 37, TCGA 1992
applies in this situation to exclude from the calculation of the capital gain or loss arising on
disposal (or part disposal) of the FCBA the whole, or the relevant part, of the withdrawal that
is taxable as remitted income (see HMRC guidance at www.hmrc.gov.uk/cnr/fcba-technicalnote.pdf).
92. In summary HMRC’s view is that where foreign currency, other than sterling, is remitted the
taxable sterling amount is determined by using the exchange rate on the date of remittance
for the currency. There will therefore be no CGT on the remittance of the currency as a result
of the s 37, TCGA 1992 adjustment.
The alternative view
93. The alternative view is that where foreign income is received in a currency other than sterling
the exchange rate to use is that on the date the income arises (or, where reasonable, the
average for the tax year in which the income arises).
Which view is correct?
94. HMRC has taken legal advice to arrive at its view. We have not seen Counsel’s Opinion but
we have seen a summary of the technical analysis supporting HMRC’s view (reproduced in
full in Appendix 1). HMRC draws on case law to support its view. Supporters of the
alternative view, however, make the points that the case law is (i) prior to the enactment of FA
2008 (which introduced s 809L, ITA 2007 (meaning of ’remitted to the UK’)); and (ii) does not
in any event directly address this specific point (see Appendix 2).
95. We would argue that the alternative view is consistent with the remittance basis legislation at
Chapter A1, Part 14, ITA 2007. For capital gains, following Capcount v Evans, conversion
takes place when a gain is realised (with the base cost being converted at the exchange rate
at the time the acquisition took place), with a further gain or loss accruing when the foreign
currency is exchanged for sterling. There are no special rules for remittance basis users
where foreign currency and chargeable gains are in point. Section 809L, ITA 2007 contains
no suggestion that different rules apply to income. As such it seems to us that as a matter of
construction s 809L, ITA 2007 requires conversion at the time income arises.
96. In addition to the technical points summarised above it is suggested that the alternative view
gives rise to fewer anomalies than the HMRC view.
Finance Act 2010 – modification of legislation
97. Schedule 9, Finance Act 2010 (FA 2010) contains legislation HMRC advised was necessary
to correct the interaction between the income tax and capital gains tax rules where foreign
20
currency, representing or derived from a remittance basis user’s foreign income, originally
received in a foreign currency, is remitted to the UK.
98. The legislation was drafted based on instructions assuming that HMRC’s settled view on the
conversion rate is correct. Should HMRC be incorrect then the legislation will either be
irrelevant (if the view that s 37, TCGA 1992 is not applicable is correct) or not adequate to
deal with the problem identified (if s 37, TCGA 1992 does apply then the HMRC correcting
legislation has not gone far enough to remove the interaction anomalies if the alternative view
is found to be the better interpretation).
99. The HMRC technical note which accompanied the legislation, and contains detailed
examples, can be found at www.hmrc.gov.uk/cnr/fcba-technical-note.pdf.
100. In brief, the specific issue was the s 37, TCGA 1992 adjustment, which (accepting that it
applies) resulted in the computation of artificial losses and a distorted base cost when
applying the partial disposal (A/(A+B)) formula. The legislation in FA 2010 disallows the
capital loss. With respect to the base cost, this broadly means that where there is a
remittance which is wholly or partly matched to foreign income, and there is also a part
disposal, the normal rule to determine the base cost of the remainder is disapplied with the
cost being apportioned pro rata instead. The legislation applies to disposals after 15
December 2009.
101. Where either (i) the HMRC settled view is adopted on both the exchange rate to use and the
s 37, TCGA 1992 issue; or (ii) the alternative view is adopted on the exchange rate to use but
it is accepted that s 37, TCGA 1992 should apply with respect to the CGT computation, it is
suggested that transactions prior to 16 December 2009 are reviewed to see if capital losses
can be claimed. Where such losses are claimed it is suggested that it is made clear that
reliance has been placed on the HMRC technical guidance on the subject (with appropriate
qualifications made where the alternative view on the exchange rate is taken but one agrees
with the HMRC view on the applicability of s 37, TCGA 1992).
The section 37, TCGA 1992 issue
102. The decision to make as to which view to follow with respect to the exchange rate to use
when converting foreign currency remittance basis income has no effect on the question of
whether s 37, TCGA 1992 should apply where there is a disposal of the foreign currency
representing that income. As discussed above HMRC has accepted that s 37, TCGA 1992
does apply and that the CGT computation should be adjusted accordingly.
103. Some commentators have, however, criticised both the HMRC settled view on the exchange
rate to use and also suggested that there should be no s 37, TCGA 1992 adjustment. The
argument for there being no s 37, TCGA 1992 adjustment is that the proceeds of the bank
account are not charged to any more income tax than if the receipt had been taxed on the
arising basis. If this is accepted then there can be no grounds for a s 37, TCGA 1992
adjustment where one adopts the alternative view on the exchange rate to use.
104. Others who support the alternative view on the rate of exchange date argue that s 37, TCGA
1992 does apply and that any remittance on the sale of the foreign currency leads to a capital
gains tax computation.
105. The three views can best be explained through a simple example.
Example 8
Katie Non-Dom is a UK resident foreign domiciliary who in 2010/11 is a remittance basis user. She
receives Ut$75,000 of Geneva bank interest (at a time when that equates to £100,000). The funds
21
are paid into a separate account with no additional funds being added. She sells the entire
Ut$75,000 for £120,000. The £120,000 is remitted to the UK.
HMRC’s view – a UK income tax liability on £120,000 (no CGT to pay). No CGT liability as a result
of the s 37, TCGA 1992 adjustment (and no capital loss due to the FA 2010 legislation).
The alternative view without a s 37, TCGA 1992 adjustment – (1) £100,000 subject to income tax;
and (ii) £20,000 subject to CGT.
The alternative view where it is felt the s 37, TCGA 1992 adjustment applies – (i) £100,000 subject
to income tax; and (ii) no CGT liability. With respect to the CGT there would be proceeds of
£120,000 less the £100,000 s 37, TCGA 1992 adjustment leaving adjusted net proceeds of
£20,000. From this figure one would then deduct the £100,000 base cost to arrive at a computed
loss of £80,000. This capital loss would be disallowed as a result of the FA 2010 legislation.
What to do when preparing a tax return
106. The final decision as to whether to follow the HMRC view, or to use the alternative view (and
if so whether to apply the s 37, TCGA 1992 adjustment or not), has to be made by the tax
adviser after discussions with the client. Once a decision has been reached it must be
followed consistently (until there is a Court decision clarifying the law). It is not acceptable to
use a pick and mix approach so that the more favourable method is used for each tax year or
for different remittances in the same tax year. Whatever method is used pragmatism may be
required in complex mixed funds where the currency has gone on a long and multi-layered
journey (note that where the HMRC view is used the way to deal with mixed funds is
understood to be to translate to sterling right at the end).
107. HMRC’s view is not free from doubt. If the issue comes to Court and HMRC loses, it could
require a taxpayer to amend an open return. In order to support a claim to legitimate
expectation we suggest the following:
• a white space note is included on the return stating explicitly that the issue is one where
there is no one accepted technical view and that the return has been prepared relying on
current HMRC guidance; and
• the fact the taxpayer chose to have the return prepared relying on current HMRC guidance
is recorded in writing in a letter between the client director and the client (the covering
letter that is sent out with the tax return being a suitable place for this to be recorded).
108. Where the alternative view is adopted full white space disclosure must be given in the same
way as would be done for any technical disagreement with HMRC.
Practical concerns over the foreign currency income exchange rate conversion issue
109. HMRC points out that its interpretation allows an individual to choose not to remit at a time
when the exchange rate would result in a significant income tax charge (and is more
favourable to the taxpayer where sterling appreciates). This is not always practical (the
individual may not have any other funds to draw on to meet UK needs), but where HMRC’s
view is followed care must be taken to advise the client about the timing of remittances and
the impact that this can have on the client’s UK tax liability.
110. A practitioner who decides to adopt the alternative approach will also need to make their
client fully aware of their potential tax liability if the HMRC view is correct. Where possible it
would be advisable to avoid remittances at a time when the transaction would give rise to
significant avoidable liabilities under either view. Proposed remittances should thus always be
reviewed for foreign exchange issues.
22
111. The following examples, which we put to HMRC, illustrate the potential problems. Example 9
looks at the situation where foreign income, received in a foreign currency, is used to acquire
an asset which is then brought to the UK. Example 10 considers the situation where foreign
income, received in a foreign currency, is converted into a different currency on receipt and
later remitted to the UK.
Example 9
Clara Non-Dom is a UK resident foreign domiciliary. She received Ut$2.5m of relevant foreign
income on 17 May 2008 (when it was worth £1,375,000) which she uses to acquire a painting. She
remits the painting in 2010/11 and it remains in the UK for the entire tax year such that she cannot
claim exemption under s 809X, ITA 2007.
At the time the 275 day temporary importation exemption is breached such that the remittance
becomes chargeable Ut$2.5m is worth £2m. The actual painting has declined somewhat in value
being worth £1,350,000.
What sterling amount has Clara remitted?
HMRC’s answer
This is dealt with in Chapter 5 of the RDRM:
Conditions A and B – remittances derived from foreign income or gains
Where, as in most cases, the property, service or consideration derives from a foreign currency,
the taxable amount is the pounds sterling equivalent value (at time of remittance) of the amount of
foreign currency…used to acquire or pay for the property or service
Therefore, in the example above, Clara has used Ut$2.5m RFI to purchase the painting; this is
translated into sterling on the date on which the painting is treated as having being remitted to the
UK. This would mean that £2m income is brought into charge in the UK: the fact that the painting
has depreciated in value by the time it is remitted is not relevant.
Example 10
Heidi Non-Dom is a UK resident foreign domiciliary who will make a remittance basis claim for
2008/09 to 2010/11. She receives a bonus offshore with respect to her foreign employment (all
duties performed overseas) of €1,000,000 on 14 July 2008. She immediately converts the sum to
$1,100,000 and deposits it in an offshore US dollar account. Clean capital of $3,750,000 is added
to the account on the same day, so balance is $4,850,000. On 17 March 2011, Heidi transfers
$4,000,000 to a US dollar account in the UK.
For the purposes of this example assume that the relevant exchange rates are as follows:
14 July 2008 £1=€1.55=$1.705
17 March 2011 £1=€0.25=$1.71
What sterling amount has Heidi remitted?
HMRC’s answer
Step one is to analyse the mixed fund in the offshore US dollar account. There is no need to
translate into sterling at this point.
23
Credit
Debit
Balance
Category (s
809Q(4))
2008 (Tax year 08/09)
14 July
Deposit of bonus (€1,000,000) $1,100,000
$1,100,000 Para (b)
14 July
‘Clean capital’ credit
$3,750,000
$4,850,000 Para (i)
2011 (Tax year 10/11)
17 March Withdrawal
$4,000,000 $850,000
Step 2 is to apply the ordering rules in s809Q:
Step 1 – Identify the ‘amount of transfer’ in the relevant year (2010/11)
$4,000,000
Analyse mixed fund to identify the separate
amounts of income, capital gains and capital
present for each tax year immediately before the
date of the transfer.
$1,100,000
Para (b) Relevant foreign
earnings (not subject to a
foreign tax)
Para (i) income or capital
not within another
paragraph of this
subsection
Para (b)
In this case only Tax Year 08/09 needs to be
analysed as there are no other deposits.
Step 2 – Identify the earliest paragraph above for
the relevant year, which has an amount of income
or gain in the mixed fund
Step 3 Where the amount transferred is greater than the amount identified at
Step 2 the amount transferred is treated as reduced by the amount identified in
Step 2.
Step 4 – Find the next paragraph/amount for that tax year. In the order of
preference listed above repeat Steps 2 and 3.
$3,750,000
$1,100,000
$4,000,000
less $1,100,000
= $2,900,000
Step 2 – repeated
Para (i)
$3,750,000
Step 3 If the amount at Step 2 is equal to or more than the remaining amount of £nil
the transfer (the last time step 3 was completed) treat the whole of the remaining
amount of the transfer as coming from that item of income or gain
Heidi has therefore remitted $1,100,000 from paragraph (b) which is derived from her relevant
foreign earnings of €1,000,000. This €1,000,000 is regarded as having been remitted to the UK,
and translated into sterling on the date of remittance (17 March 2011) at the exchange rate of £1 =
€0.25. Heidi is therefore subject to UK tax on £4,000,000 of her foreign earnings.
SECTION E – MIXED FUNDS
Introduction
112. The application of the mixed funds rules to foreign currency bank accounts is fraught with
difficulty (both intellectual and practical).
113. The HMRC approach to mixed funds is best explained by reproducing an example from the
Capital Gains Manual.
‘CG25392 – Remittance basis: accounts denominated in foreign currencies
To analyse an account at a specific date you must convert the figure of capital gain in sterling
back into an amount of foreign currency using the spot rate of exchange at the date of the
remittance. From the total balance in the account you can then deduct this figure and any
amount of income held in the account to arrive at a net balancing figure. This balancing figure
is normally called capital but when there have been movements in exchange rates it is not
normally possible to reconcile it with the amount that was originally treated as capital in the
foreign currency.
24
Example
Fatima is resident in the United Kingdom and claims the remittance basis in all relevant years.
In August 2009 she disposes of property in Germany for net proceeds €400,000. She bought
the property in March 2007 for €260,000. She banks the proceeds in a new account in
Germany and in November 2010 transfers €100,000 from the account to a UK account
denominated in Sterling. The Sterling: Euro exchange rates were
March 2007
0.571
August 2009
0.909
November 2010 0.966
Foreign chargeable gain arising in August 2009:
Proceeds £363,600 (400,000 x 0.909)
LESS cost £148,460 (260,000 x 0.571)
Gain
£215,140 equivalent to €236,677 (215,140/0.909)
This gain is computed once and for all in Sterling at the time of the exchange, but as the
foreign currency representing the gain is held in bank account there is the possibility that a
further gain or loss will arise when there is a withdrawal from that account (TCGA92/S252,
see CG78330).
As at August 2009 the bank account is a mixed fund containing foreign chargeable gains
£215,140 (€236,677) and capital £148,461 (€163,323, ie €400,000 - €236,677).
By November 2010 this gain is equivalent to €222,712 (215,140/0.966) ie there is an
unrealised foreign exchange loss of £13,490 (ie €(236,677 - 222,712) = €13,965 expressed in
Sterling). Under the mixed fund rules (see CG25385+) the amount transferred out of the
mixed fund is treated as containing only foreign chargeable gains. The proportion of the gain
remitted is the Sterling equivalent of the amount transferred as fraction of the total foreign
chargeable gain: (100,000 x 0.966)/215,140 = 44.9%.
The same proportion of the loss due to exchange rate movements (ie 44.9% of £13,490) may
be an allowable loss: see CG25330+ for information on losses under the remittance basis.
So the amount of the original gain remitted is £96,600 and, going forward, the mixed fund
contains £118,540 foreign chargeable gain (£215,140 - £96,600), giving it an overall
composition of €122,712 gains plus €177,288 capital (€300,000 total less the euro equivalent
of the remaining gain).’
Tax Faculty’s comments on CG25392
114. We agree that £96,600 of capital gains have been remitted, but we do not agree with the
methodology adopted and do not accept that a capital loss has arisen. Indeed as the foreign
currency appreciated against sterling the remittance to the UK being a partial disposal of the
currency within the bank account would have realised a foreign chargeable gain of £5,700.
There is a partial disposal, proceeds being £96,600 (that is €100,000 x 0.966), with the base
cost being £90,900 (a quarter of the funds within the account have been transferred so
(A/(A+B)) will simplify down to ¼ such that the base cost equates to ¼ (400,000 x 0.909)).
115. Our technical analysis for the remittance figure of £96,600 is based on the application of the
mixed fund rules. As there was a remittance from a mixed fund the application of s 809Q (3)
and s 809Q (7), ITA 2007 mean that the remittance should be fixed at the sterling equivalent
of the €100,000 translated using the rate of exchange on the remittance date (0.966) to arrive
25
at £96,600. This would be matched in accordance with the mixed fund ordering rules to the
kinds of income and capital within the account immediately before the transfer (such that the
capital gain of £5,700 realised on the transfer would not be included). This would result in
matching £96,600 of the 2009/10 chargeable gains. This would leave within the 2009/10
chargeable gains category £118,540 of 2009/10 chargeable gains (that is £215,140 less
£96,600) plus the chargeable gain of £5,700 realised as a result of the partial disposal on the
transfer to the UK.
General comments on the mixed fund issue and the difference in approach
116. HMRC’s position where there is remittance basis income and/or gains in a mixed fund is that
the analysis must be in the foreign currency adopting the principles set down in CG25392 for
chargeable gains. This treatment follows from HMRC’s view on the conversion of remittance
basis foreign income received in a foreign currency.
117. Where the alternative approach is adopted the mixed fund account can be analysed in
sterling with the various kinds of income and capital converted to sterling when they arise.
The calculations are complex but we believe that the alternative approach produces a more
credible answer and is easier to apply than HMRC’s approach.
118. It should be noted that in the examples at RDRM33580 (which at the time of writing does not
appear to have been adjusted for the views expressed in the December 2009 HMRC
technical note on the application of s 37 TCGA 1992) within its Residence, Domicile and
Remittance Basis Manual HMRC indicates that any foreign currency gain on the transfer to
the UK of foreign currency operates outside the mixed rules such that (i) the amount remitted
is matched in accordance with the mixed fund rules and any funds matched to remittance
basis income or gains are chargeable; and (ii) any chargeable gain on the foreign currency
transfer is chargeable.
SECTION F - THE AUTOMATIC REMITTANCE BASIS
Introduction
119. To qualify for the automatic remittance basis under s 809D, ITA 2007 aggregate unremitted
foreign income and gains for the relevant tax year must be less than £2,000. The
methodology for computing gains is the same as for all other purposes.
120. Given the controversy over the issue of converting remittance basis income received in a
foreign currency, readers will appreciate that where foreign income is received in a currency
other than sterling there must be a method by which one calculates the unremitted foreign
income.
Initial HMRC approach
121. The March 2009 version of the RDRM gave the following guidance:
‘In order to determine whether the amount of an individual's foreign income which is not
remitted in a tax year is below £2,000, the amounts should be converted to pounds sterling at
the rate of exchange prevailing on the date that the unremitted income arose. Foreign gains
are always calculated in pounds sterling.
However, where income credits are frequent throughout the year, you can accept
calculations where the individual has chosen to convert their income using the average, or
‘mean’ rate of exchange for the tax year in question. The amount of unremitted income
arrived at using this method must not differ greatly from an amount which would be arrived at
using ‘spot’ rates, for example in times of high exchange rate volatility. If adopted, this
method must be used consistently in future tax years for income from this source. This
26
applies only to unremitted income (not gains) which is received in frequent instalments
throughout the tax year and where a ‘spot rate’ calculation would be an excessive
undertaking, for example bank interest received daily or weekly.’
122. This approach was sensible and one which all practitioners could support.
Revised HMRC approach
123. In August 2009 HMRC issued revised guidance:
‘For the purposes of determining whether the amount of an individual's foreign income which
is 'not remitted' in a tax year is below £2,000 they obviously cannot apply the usual principle
for remittance basis users of using the exchange rate at the time of remittance. Instead the
balance of the unremitted foreign income is converted to pounds sterling at the rate of
exchange prevailing on the last day of the tax year.’
124. Detailed HMRC guidance in this area can now be found at RDRM31190 of its Residence,
Domicile and Remittance Basis Manual.
125. HMRC indicated that for 2008/09 it would accept either its current approved method (the
August 2009 guidance) or the method given in March 2009 as that was the advice given in
the 2008/09 tax year. For later years HMRC expects the calculation to be carried out in
accordance with the revised guidance.
The problem for practitioners
126. Those practitioners who advocate the alternative view, on the conversion of remittance basis
foreign income received in a currency other than sterling, will not agree with the revised
guidance.
127. The technical arguments are the same as for the conversion rate for foreign income received
in a foreign currency. Any practitioner who decides to adopt the alternative approach will need
to do so consistently. Whatever basis is used full disclosure should be provided by way of a
white space note on the self assessment return.
© The Institute of Chartered Accountants in England and Wales 2011
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27
APPENDIX 1
HMRC TECHNICAL NOTE SETTING DOWN ITS SETTLED POSITION ON FOREIGN INCOME
RECEIVED IN NON-STERLING CURRENCY AND THE £2,000 THRESHOLD (S 809D, ITA 2007)
Background
This note sets out HMRC’s position regarding the correct date and rate of exchange to be used, for
UK income tax purposes, by remittance basis users in relation to income initially received outside
of the UK, in a foreign currency, and later remitted to the UK.
It has always been HMRC’s view that, for remittance basis users, overseas income should be
translated into sterling using the exchange rate in force on the date the income is remitted into the
UK. The changes made to the remittance basis rules in FA 2008 have not altered this position.
This note also explains the rationale behind HMRC’s stated position on exchange rates when
determining the amount of unremitted foreign income for the purposes of the £2,000 threshold in s
809D ITA 2007. This is a new requirement which results solely from the introduction of the new
remittance basis rules in FA 2008.
Remittances of foreign income received in a non-sterling currency
It is an established principle that income which is chargeable to UK income tax will be assessed in
British pound sterling (hereafter ‘sterling’), and that any assessment of UK income tax liability will
be issued in sterling.
Remittance basis users may receive income offshore in a foreign currency. Such foreign income
and earnings which are chargeable to tax on the remittance basis only become chargeable to UK
tax when they are remitted to the UK. The remittance to the UK is the event that triggers the UK tax
charge. It is only at this point that it is necessary to ascertain the taxable amount (in sterling)
remitted to the UK that is taxable as foreign income. It follows that it is the date on which that
amount is treated as remitted to the UK that the translation to sterling should occur.
Note – in some cases the actual ‘remittance’ may occur fully within the non-sterling currency,
particularly when, for example, there is no physical transfer of anything tangible from ‘offshore’ to
‘onshore’, such as repayment offshore of a relevant debt.
Income that is regarded as ‘foreign income’ may be received offshore in sterling. It may later be
converted into a foreign currency, for example if paid into a non-sterling account. In such cases the
amount of a remittance basis user’s foreign taxable income will be the amount actually due and
originally received in sterling. It is of no relevance whether the eventual ‘taxable remittance’ that is,
or that is derived from, that income is made in a foreign currency or is converted back into sterling
before being remitted.
In all cases HMRC will tax the individual’s foreign income as income; the question is simply what
sterling value to give that income, and more importantly, when is it necessary to calculate that
value. HMRC will never tax an amount greater than the income received; for example, if $50,000
US dollars are received then only $50,000 US dollars will ever be subject to tax – that is, the
sterling equivalent of that $50,000 for income tax purposes at the time at which the UK tax liability
occurs.
For a remittance basis user whose foreign income is received offshore in, say, dollars, there is no
requirement to value the dollars twice (that is on date of receipt offshore and on the date an
amount becomes taxable by virtue of being remitted to the UK). In other words, for income tax
purposes, in order to tax the income received in dollars the conversion into sterling should only be
made once, namely on the occasion that the income comes into charge.
28
There is a difference in the way in which arising and remittance basis users value their overseas
income in sterling. The former should carry out the sterling valuation using the exchange rate in
force when the income arises, as that is when the charge occurs, whilst the latter should use the
rate in force on the date of remittance as that is when their charge to tax in the UK becomes
assessable.
For capital gains tax purposes, the gains/losses on disposals of foreign currency and debits from
foreign currency bank accounts occur simply because foreign currency and non-sterling debts with
banks are chargeable assets (s21(1)(b) and s252 TCGA). For this reason, when funds are
withdrawn from a non-sterling bank account, there is a disposal (or part disposal) of an asset (that
is, the debt owed by the bank). This does not preclude the withdrawn funds having the character of
the income originally credited to the account. For example, if a non-domiciled remittance basis user
was paid his salary (consisting totally of his relevant foreign earnings) of £25,000 into his Jersey
account he might immediately purchase a painting with that £25,000 to decorate his Jersey holiday
home. At that point it is clear that the untaxed income is both ‘within’ the painting and that the
individual holds an asset as well. So it is with bank debts receivable: they are simply assets
acquired using income and in which the character of the original income can clearly be discerned.
The explanatory notes which accompanied the introduction of the Income Tax (Trading and Other
Income) Act 2005 contained the following explanation of the Part 8: Foreign Income changes,
which touched a little on the historic situation at para 1621 to 1624 thus:
1621. Unless the remittance basis applies (see Chapter 2 of this Part of this Act)….the amount of
relevant foreign income charged for a tax year is the income arising in the year. This rule is based
on section 65(1) of ICTA and forms part of the basis of each ‘income charged’ provision in this Act
for relevant foreign income…..Where a charge includes both relevant foreign income and
equivalent UK income the same rule serves for both….
1622. The ‘income charged’ provisions do not rewrite the words ‘whether the income has been or
will be received in the United Kingdom’ from section 65(1) of ICTA.
1623. Before FA 1914, the remittance basis was the only basis of assessment for income within
Schedule D Cases IV and V. It applied to all UK residents and not just to those persons who were
non-UK domiciled, or were both not ordinarily resident in the United Kingdom and were either
Commonwealth or Irish citizens (as necessary for a claim under section 65(4) of ICTA). FA 1914
took certain Schedule D Cases IV and V income out of the remittance basis and that income was
taxed thereafter on the arising basis.
1624. The words ‘whether the income has been or will be received in the United Kingdom’ were
included in the 1914 legislation to emphasise that income within Schedule D Cases IV and V was
now chargeable to tax, whether or not the income had been remitted to the United Kingdom. That
emphasis is no longer needed.
This approach is in the remittance basis user’s favour. This is because, whether the exchange rate
on the date the income arises or the date it is remitted is used to translate the foreign income into
sterling, there has to be consistency between the two – it has to be one or the other. An individual
has an element of control over the date of remittance and can choose to remit income when the
exchange rate is in his favour or not to remit income when the exchange rate is not in his favour.
An individual does not generally have similar control over the date on which foreign income arises.
This timing point creates an additional potential difficulty when applying the same date of exchange
to the non-sterling foreign income of remittance basis users as to taxpayers taxed on the arising
basis.
29
Compare two taxpayers: Mr A is taxed on the arising basic. Mrs R on the remittance basis. Both
receive employment income for an employment carried out totally overseas for a non-UK
employer.
Exchange rates:
1 May Year 1
1 May Year 2
1 May Year 3
$1 = £1.20.
$1 = £1.10.
$1 = £1.50
Mr A and Mrs R receive $100,000 on 1 May in Year 1.
Mr A will have to pay tax on £120,000 in Year 1. Whether he brings the $100,000 in to the UK on 1
May in Year 1 when it is worth £120,000, or on 1 May in Year 2 when it is worth £110,000, or on 1
May in Year 3, when it is worth £150,000, has no impact on Mr A’s income tax liabilities.
If Mrs R, on the other hand, translates her foreign income into sterling on 1 May Year 1 she will, on
this argument, be said to have taxable RFE of £120,000.
In Year 2, she could remit every one of the $100,000 dollars received, which would translate only
to £110,000 and yet still pay tax on £120,000 – which would appear that we are taxing an
additional $9090 , or we are applying a tax rate of c.43.5% (see para 14).
In Year 3 she only has to remit $80,000 of the dollars she received to be regarded as having
‘remitted’ all her RFE. The remaining $20,000 dollars have not been ‘touched’.
Further, this maintains a ‘proportionality’ approach to what is eventually taxed, as the following
example and table illustrates; the figures and exchange rates used here are deliberately chosen to
illustrate the point in simple terms.
Example:
Assume an amount of $10,000 is received by an individual on, say, 1 May 2008. All of those
dollars are remitted to the UK on 1 October 2015 and are subject to income tax at the rate then
prevailing – assumed to be 40% for these purposes.
As Columns H and I show, the absolute amount of income tax paid as a proportion of the actual
amount received in the UK on the 1 October 2015 fluctuates heavily if the exchange rate at 1 May
2008 is applied
Theoretically, given large fluctuations in currency exchange rates, or with changes in higher tax
rates, a situation could arise in which the tax due is actually more than the monies the individual
actually receives in the UK (consider, for example, the position in the first row of figures below with
a 50% tax rate)
A
Amount
received
in
$
$10,000
B
Exchange
rate on
date $
income
arose
$1 =
C
Sterling
amount
of foreign
income is
translated
to sterling
on date
arose
$1 = £1.5
£15,000
£15,000
£15,000
D
Amount
of
income
tax due
(assume
40%
rate)
if use
figure in
column
C
£6,000
£6,000
£6,000
E
Exchange
rate on
date $
income
remitted
(1 Oct
2015)
F
Amount
of foreign
income is
translated
to sterling
on date
remitted
G
Amount
of
income
tax due
(@40%
rate)
if use
figure in
column
F
$1 =0.75
$1 =£1
$1= £1.5
£7,500
£10,000
£15,000
£3,000
£4,000
£6,000
H
I
Tax paid as a
proportion on
amount actually
received in UK.
If use
figures
from
column
C
80%
60%
40%
If use
figures
from
column
G
40%
40%
40%
30
£15,000
£15,000
£6,000
£6,000
$1 =£2
$1=£2.25
£20,000
£22,500
£8,000
£9,000
30%
27%
40%
40%
Case law
There is little case law that addresses this point directly. Some early case law from the 1920s and
1930s deals with the taxation of companies and whether foreign exchange gains or losses should
be regarded as capital or investment items, or form part of the company’s trade. It is possible to
draw only tentative principles from this, especially as in many cases the issue of arising or
remittance basis was not in point.
The 1933 case of Magraw v Lewis (18TC222) concerned a pension of 229 South African pounds,
paid to a UK resident, which had been awarded by the Government of the Union of South Africa
and was paid by them through the High Commissioner of the Union Government in London. At the
time such foreign income was chargeable when received in the UK. The case concerned certain
deductions made by the SA Government from the pension, but during the case the issue of how
much should be taxed in British pound sterling was raised. In Magraw, the pension was actually
paid to the appellant in the UK in sterling, so the exchange issue was a little different. In the course
of his judgement at the High Court Finlay J said, at page 225,
What happened was this. The Appellant was paid a particular sum in United Kingdom pounds and
by reason of the state of the exchange, the amount which he was paid in United Kingdom pounds
was larger – a greater number of pounds – than the pension awarded to him in South Africa
reckoned in South African pounds.
He says that he ought not to pay Income Tax upon the amount which he has received in this
country. I am bound to say that in regard to that the law appears to be as plain as in the other
case….It is clear that the Income Tax authorities can have regard only to what is paid. What is paid
is a pension of a particular amount in United Kingdom pounds, £268 I think it is – but the exact
amount does not matter – that is paid to the Appellant.
That is what he has to pay tax upon, and he has to pay on that in the appropriate number of
pounds in British currency. As I say, about that point there does not appear to be any legal difficulty
– indeed, I do not think there is any legal difficulty about either point ….. I cannot myself see that
any one, even a layman, could conceive that there was any grievance when he gets a particular
income in United Kingdom pounds, in paying tax in United Kingdom pounds at the appropriate rate
upon that income
In Thomson (HM Inspector of Taxes) v Moyse(1) (1958–1961) 39 TC, whilst addressing a point
about whether a remittance required a transmission from abroad, at the House of Lords Lord Reid
said at p329 (bold emphasis added)
Before considering these authorities, I think it well to see what the effect would be if this view were
right. I take a case which no one has ever even suggested would not be within the scope of these
provisions – the case of a bank acting as a collecting agent. If a customer hands to an English
bank for collection a cheque drawn on a foreign bank, the English bank will send the cheque
abroad for collection and, when notified that the money has been collected, it will give to the
customer in this country the equivalent in sterling at the current rate of exchange.
References to other case law have been made to HMRC with regard to this issue:
Bentley v Pike (1981) STC 360 and Capcount Trading v Evans (1993) STC 11 – these concern
Capital Gains Tax on chargeable gains accruing on the disposal of an asset, and therefore have no
bearing on the issue of overseas income. They state that where there is an acquisition and
disposal in a foreign currency the taxable capital gain is calculated by deducting the sterling value
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of the acquisition at the time of acquisition from the sterling value of the sale proceeds at the time
of sale.
Pattison v Marine Midland 57TC219 related to tax on trading profits and the House of Lords upheld
the decision of the Court of Appeal rejecting HMRC’s contention that, with respect to a loan made
by a company, the difference in sterling terms between the value of the dollars at the time of the
loan and the time of the repayment represented a taxable trading profit of the company.
In Capcount the Court of Appeal specifically distinguished Marine Midland on the basis that it was
concerned with trading profits whereas Capcount was concerned with capital gains. Nolan LJ
states:
‘Against that background I do not find it surprising that, in the case of trading companies operating
abroad the commercial accounting procedures which, it seems, commonly result in the profit being
first computed in the particular overseas currency and then translated into sterling for tax purposes
should be adopted and accepted by the Revenue….the income tax legislation, unlike the capital
gains tax legislation, is not generally concerned with the measurement of a gain or loss on a single
disposal but with a balance at the year end and computed on accounting principles.’
The calculation of gains arising on non-sterling acquisitions and/or disposals in sterling is different
from the calculation of the amount of taxable income in sterling; it is clear from Bentley v Pike that
the sterling translation must be made using the exchange rate in force at the dates of the
transaction (i.e. date of acquisition for acquisition cost, and disposal for disposal proceeds) and the
calculation completed in sterling. This is understandable for CG calculation purposes, as CG is
fundamentally a transaction-based tax.
Apart from the £2,000 threshold (see below), this note only concerns remittances of foreign
income. Bentley and Capcount concern capital gains, not income, and are therefore not relevant.
Marine Midland supports the approach taken by HMRC in the guidance. Marine Midland concerned
trading profits rather than income but an individual’s income is more on a par with the profits of a
business than with capital gains because neither an individual’s income nor the profits of a
business require individual disposals. Consequently, there is no conflict between the principles
established in Marine Midland and HMRC’s position on the treatment of an individual’s income.
HMRC’s published guidance
HMRC’s published technical guidance is/was as follows:
IM1670: Exchanges (now withdrawn) for Case IV/V income:
Income chargeable on the arising basis should be translated into sterling at the rate of exchange
prevailing at the time when the income arose (see IM1640); where, however, credits are frequent
and the taxpayer desires to translate at the mean rate of exchange for the basis year, that course
may be followed, provided that it is adopted consistently year by year, and that the amounts to be
assessed are not materially affected.
As regards the translation of trading income, see IM2380 – IM2381.
Where income is chargeable on the remittance basis, the income should be taken to be the
amount received in the United Kingdom, translated to sterling, if necessary, at the rate of exchange
prevailing on the date of receipt.
Any case of difficulty should be referred to FID (Exchange).
SE 40033: Emoluments chargeable under Cases III of Schedule E
For emoluments chargeable under Case III the conversion should be made at the date they were
received in the United Kingdom. (See SE40301 for the meaning of ‘received in the United
Kingdom’.)
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EIM40033: General earnings taxable when remitted to the United Kingdom
For earnings that are taxable when remitted to the United Kingdom the conversion should be made
at the date they were remitted. (See EIM40301 for the meaning of ‘remitted to the United
Kingdom’.)
It is also the guidance given in the notes that accompany the foreign pages of the SA tax return
(the SA106) from 96/97.
Income taxable on the remittance basis should be translated to sterling at the rate of exchange
prevailing on the date of receipt in the UK’.
The notes that accompany the employment income pages (the SA103) are silent on the exchange
rate to be used; the Helpsheets for those with foreign emoluments have boxes denominated in
sterling but there is no explicit instruction on how to translate emoluments received in non-sterling
currencies into sterling, for either arising or remittance basis users. Of course many individuals will
receive foreign emoluments in sterling, so a conversion is not always necessary.
Section 809D, ITA 2007 – unremitted foreign income and the £2,000 threshold
As noted above, prior to 6 April 2008 there was, technically, no tax need for remittance basis users
to determine a sterling value for foreign income received until/unless it was remitted to the UK and
so subject to UK tax. However, the introduction of s 809D, ITA 2007 means there is now a
requirement to compute in sterling the amount of unremitted foreign income for the purposes of
the £2,000 threshold.
The valuation in sterling of unremitted foreign income received in a non-sterling currency for a
remittance basis user was therefore a new issue. Our initial view, as published in our guidance
(see above), was that unremitted foreign income should be translated on the day it arose, using the
same pattern that applied to foreign income chargeable on the Arising basis – as outlined at
IM1670 (see above). It is acknowledged that this was proffered as a quick and pragmatic solution,
utilising an already existing practice.
Following publication the first version of our guidance, we received several representations from
professional advisors querying whether this was correct and/or appropriate. In particular, it was
stated that it was unclear what part of an individual’s total foreign income would be regarded as
remitted if the exchange rate on the date the income arose was employed, for example, would a
part disposal formula akin to the one employed for capital gains tax be required, or would a LIFO or
FIFO basis suffice, and how would it be applied to all income credits and debits in the account.
Following these representations, HMRC considered the situation again, to identify the approach
most in line with that suggested by the legislation.
Section 809D(2) provides that:
‘The amount of an individual’s ‘unremitted’ foreign income and gains for a tax year is:
(a) the total amount of what would (if this section applied) be the individual’s foreign income and
gains for that year, minus
(b) the total amount of those income and gains that are remitted to the United Kingdom in that
year.’
On further consideration of the wording of s 809D, HMRC took the view that for foreign income,
this calculation can only be made on the last day of the tax year, as that is the only date an
individual’s total and unremitted foreign income for a tax year can be ascertained. Consequently
the foreign currency should be translated into sterling on that date also, for both the total foreign
income and the remitted foreign income for the purposes of s 809D only.
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Although UK income tax is charged on sterling amounts, it does not follow that the calculations to
get to an income threshold such as this in s 809D necessarily have to be made in sterling.
Consequently the formula of deducting the remitted income from the total income can be carried
out in the foreign currency on the last day of the tax year and then the balance which is left namely
the ‘unremitted foreign income’ can be translated into sterling on that date to ascertain whether it is
below the £2,000 limit.
This is now the position agreed by HMRC for determining the threshold for s 809D purposes only.
Our revised guidance at RDRM (published Aug 2009) set out this method, and accepted that this
method may be used from 6 April 2008. However HMRC are content to allow the method given in
previous guidance (including HMRC6 and the previous version of the RDRM (published in March
2009) to be used for tax year 2008/09 if the customer wishes, as per the advice given in that tax
year.
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APPENDIX 2
SUPPORT FOR THE ALTERNATIVE VIEW ON FOREIGN INCOME RECEIVED IN NONSTERLING CURRENCY AND THE £2,000 THRESHOLD (S 809D, ITA 2007)
Consideration of the available case law
The key case law with respect to foreign currency are summarised in the following paragraphs.
The judgment in the Privy Council case of Payne v Deputy Federal Commissioner of Taxation
1936 AC 497 indicated that conversion at the time of receipt is required (reading sterling for
Australian currency). This case did look at currency fluctuation but the taxpayer was not a
remittance basis user.
In Capcount v Evans [1993] STC 11 and Pattison v Marine Midland [1984] STC 10 the judgments
both highlighted the key point that the treatment of currency fluctuation is a matter of construing the
particular charging provision at issue. Thus:
In Pattison v Marine Midland the decision turned on the application of normal rules of commercial
accounting in computing trading profits.
In Capcount v Evans, the decision turned on the CGT rule that foreign currency is an asset.
It is suggested that the following cases are not relevant:
Magraw v Lewis is not relevant as the income arose and was remitted at the same time;
the dictum in Thomson v Moyse is not relevant as exchange fluctuation was not an issue in the
case;
Patrick v Lloyd [1944] 26TC 284 was a case where income had been invested and the proceeds of
sale remitted. It was accepted on all sides that the amount taxable on remittance was confined to
the original income and did not include the profit on the investments. Here too, however, currency
fluctuation does not appear to have been an issue.
It is, therefore, submitted that the case law in the areas was not decisive either way prior to 6 April
2008 and that following the enactment of FA 2008 the old case law cannot be relied on anyway.
The scheme of the legislation
There are no specific statutory provisions dealing with the exchange rate issue (though as set
down in the main body of this guidance at paras 94-96 it is suggested that the alternative view fits
better with the overall scheme of the remittance basis legislation) and no directly relevant case law.
Where there is no statutory guidance and no clear guidance from the case law, the correct
approach is that which best suits the scheme of the provisions.
Logically subjecting the currency gain or loss to CGT as the alternative view does seems the
correct approach and it is suggested that the HMRC argument that remittance basis foreign
income should be converted at the date that it is remitted may be based on a faulty premise.
HMRC in its technical analysis talks of the remittance basis income only becoming taxable when
remitted. Relevant foreign income and relevant employment income are subject to tax whether
remitted on not but, where the remittance basis applies, the charge is limited to what is remitted.
This being so we do not see why income remittances should be treated any differently from
remittances of chargeable gains.
The alternative view is significantly easier to apply in complicated mixed fund scenarios and avoids
various anomalies thrown up by the HMRC settled view such as the fact that it would result in an
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individual being subject to tax on income using the remittance date exchange rate for the original
foreign currency in which the income was held when the income may have been changed into
another currency (see example 10 of the main body of this guidance) such that what they are taxed
on bears no resemblance whatsoever to what they received.
The alternative view also fits more logically with the accepted view on the exchange rate to use to
convert any foreign tax credit to sterling (see paras 86-89 of the main body of this guidance).
We accept HMRC’s contention that the alternative view will work against taxpayers when foreign
currency depreciates against sterling but this is not a technical argument as to why the view is
incorrect. We also agree that it is unfair that the legislation can result in a tax charge larger than
the amount that is remitted, but that results from the changes to the remittance rules brought in by
Finance Act 2008 and is not an argument against the alternative view. Where the remittance is
from a mixed fund the mixed fund provisions will apply to limit the remittance to the amount of that
remittance (as discussed in paras 112-118 of the main body of this guidance).
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