Ascertainable contingent consideration and foreign currency
13th January 2023
Posted in Articles by Andrew Marr
The issue
When an asset is disposed of, some consideration may be ascertainable but contingent on a future event. If this is the case, then (under section 48 of TCGA 1992) taxpayers are directed to tax themselves on the full consideration.
Example
Ben sells his trading company to a competitor on 1 February 2023. He will receive £1m upfront and a further £200,000 if the company’s average profits for the three years ended 31 December 2025 average more than £250,000. Even though Ben will not know whether the hurdle has been met until some time in 2026, he will have to calculate his gain based on proceeds of £1.25m now.
What, I hear you ask, happens if the company does not beat this profit hurdle? Ben will then have paid tax on £250,000 more proceeds than he ‘should’ have done. In this case (a case where the consideration proves irrecoverable) the legislation allows Ben to write to HMRC to ask for the tax calculation to be adjusted and to get them to repay some of the tax. He will have four years from the end of the tax year that the £250,000 became irrecoverable to do this.
Foreign currency
So far so good, but what happens if the ascertainable contingent consideration is payable in foreign currency? Let’s suppose that instead of £250,000 above, the buyer had agreed to pay $300,000 (and let’s assume $300,000 is equivalent to £250,000). Here, Ben would have to include the $300,000 as £250,000 in his return and hope that it didn’t fall in value. If the $300,000 only ends up being worth £150,000 (say) when he receives it, then he cannot make a claim under the above legislation because the consideration will not have proved to be irrecoverable (as it would have been paid). Instead, in this case he would trigger a £100,000 capital loss, but he may not have any gains to set it against.
Forbes Dawson view
Although the section 48 relief is generally helpful, it does seem rather cruel that it cannot be used to relieve exchange losses. It would be relatively easy to change the legislation to make this work. In cases where this is a real concern it may be possible to hedge the position using financial instruments so that a commercial loss is avoided. Alternatively, pressure could be put on the buyer to transact in sterling so as to push the foreign exchange problem on to them.
