Enter Your E-mail

HMRC have published a Technical Note setting out various issues and potential approaches concerning overhedging and underhedging arrangements.

In the 2009 Budget, the government announced that it is aware of certain structured arrangements (often described as overhedging or underhedging) which, although not normally undertaken for tax avoidance, involve fragmenting transactions across group companies to ensure the Exchequer bears the full economic risk to the group. The Government believes that the economic risks should be shared between the Exchequer and business as Parliament intended.

The Government is clear that it wants to remove Exchequer risk arising from volatility from exchange movements and other indices where there are rules in place to allow businesses to hedge those risks on a tax neutral basis but groups deliberately choose instead to offset their risks (either existing or newly created) under structured financial arrangements that leave the Exchequer fully exposed to the risk in question.

A new Technical Note entitled Technical Note on overhedging and underhedging, sets out proposals for how the risk to the Exchequer from these arrangements can be removed in a targeted manner.

These proposals do not seek to disturb in any way the treatment of trading gains and losses on unhedged speculative positions taken by financial traders and others in financial instruments that are not part of such arrangements.

The note:

• sets out the background and framework for the present tax rules on hedging: explaining how those rules provide for effective post tax hedging in many circumstances;
• outlines the Government's concerns with those overhedging and underhedging arrangements which sidestep or exploit the rules to obtain returns or levels of financing costs commensurate with exposure to certain economic risks whilst effectively passing those risks on to the Exchequer;
• sets out HMRC's proposals for stopping these arrangements; and
• includes draft legislative clauses and guidance on how these rules would operate in various scenarios.

Comments on the proposals are invited by 30 September 2009. For further information, see the HMRC website at
http://www.hmrc.gov.uk/drafts/over-underhedging.htm.