INTM552130 - Hybrids: hybrid transfers (Chapter 4): conditions to be satisfied: condition D - foreign exchange differences
A foreign exchange loss does not give rise to a Case 1 or Case 2 hybrid transfer deduction/non-inclusion mismatch. It is not within the scope of the rules.
An example of a transaction to which the dual treatment condition in s259DA(4) TIOPA 2010 might apply is a repo, see INTM552040.
It is quite possible that the in-substance borrower on a repo is a UK company with a sterling functional currency, but the sale and repurchase price are denominated in some other currency.
For example, a UK company with a sterling functional currency enters into a euro-denominated repo with a related party. Absent the hybrid and other mismatch legislation, the UK company would have been entitled (under s551 CTA 2009) to a deduction for both in-substance interest and an exchange loss on a debtor repo denominated in euros. The counterparty is not taxed either on deemed interest or any exchange difference. In this example the counteraction will deny the deemed interest deduction, but not the exchange loss.
The key point as regards the exchange loss is that it should not give rise to a quasi-payment within s259BB(2) TIOPA 2010.