International accountant and shipping consultant Moore Stephens says it is regrettable that changes announced for inclusion in the UK Finance Bill 2013 have failed to remove exchange rate distortions from the calculation of capital gains on ships.
Currently, all capital gains and losses subject to UK corporation tax are calculated by reference to sterling, with the result that capital gains and losses arising on non-sterling assets, including certain ships, can be significantly distorted by exchange rate fluctuations.
In order to avoid such distortions, the UK government has now proposed changes to these rules so that capital gains and losses in some cases can be calculated in a currency other than sterling. Under the proposed changes, where a company has a non-sterling functional currency, capital gains and losses will in future be calculated in the company’s functional currency. But this will only apply to shares and not to physical assets.
UK resident shipowning companies are subject to potentially very large distortions due to exchange rate fluctuations when calculating capital gains or losses on their ships. The rule changes are relevant for UK companies that are not in the UK tonnage tax regime, or that have some ships wholly or partly outside tonnage tax. They will also be relevant for companies owning chargeable assets other than ships which are subject to exchange rate fluctuations by reference to sterling.
Moore Stephens tax partner Sue Bill explains, “To its credit, the UK government has acted to remove exchange rate distortions in respect of capital gains on shares. It has also acknowledged representations made in respect of oil industry assets, engines, and aircraft, as well as ships and has noted that this is an area which could form the basis of further work. But it has not yet acted to remove exchange rate distortions when calculating capital gains on ships. Moore Stephens made representation to the government that the proposed changes to the existing rules should apply to ships as well as to shares, so that any calculations are made in the company’s functional currency. Despite this, the proposed rules for the Finance Bill 2013, which were published on 11 December, still only relate to shares.”