Moore Stephens Calls for Rethink on Capital Gains Exchange Rate Distortions on Ships
International accountant and shipping consultant Moore Stephens has urged the UK government to remove exchange rate distortions when calculating capital gains on ships.
Moore Stephens tax partner Sue Bill explains, “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. For example, even where there is no increase in the dollar or euro value of a ship, a taxable capital gain can arise solely as a result of a fall in the value of sterling.
“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, although this is less of an issue if there is a capital loss, because relief is likely to be available by way of capital allowances rather than in the form of a capital loss.
“These rule changes are not relevant for UK shipowning companies whose ships have all been within the tonnage tax regime throughout the period of ownership by that company. But they 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.”
The closing date to comment on the UK government’s proposals is 15 October 2012. Moore Stephens has 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.