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HMRC internal manual

Business Income Manual

Foreign exchange: monetary assets and liabilities: general principles

A business may hold monetary assets that are denominated in a foreign currency. Examples are foreign currency bank accounts, trade debts, loan notes or bonds, or foreign currency held in notes or coins. It may also have foreign currency liabilities - for example, debts owed to suppliers, bank overdrafts or long-term bank loans.

Exchange gains or losses will be realised when such monetary items are settled. The accounts will also show unrealised gains or losses where such assets or liabilities exist at the end of the period of account and are retranslated into sterling at the closing rate (see BIM39510).

In deciding whether an exchange gain should be taxed as trading income, or a loss relieved, you apply normal principles. A gain is taxable if:

  • it is a receipt from a trade, and
  • it is not on capital account.

An exchange loss is a trading expense if:

  • it is not on capital account, and
  • it is a loss incurred wholly and exclusively for the purposes of the trade.

S25 Income Tax (Trading and Other Income) Act 2005 requires trading profits to be computed in accordance with generally accepted accounting practice, subject to any over-riding rule of law. So in general a business must bring into its computation all exchange gains and losses shown in its accounts, whether realised or unrealised, provided they conform to the general principles above.

There is an exception where exchange differences on assets and liabilities are ’matched’. This is covered at BIM39555.

  • For general guidance on the capital/revenue divide see BIM35000 onwards.
  • For general guidance on wholly and exclusively see BIM37000 onwards.
  • For more detail at exchange differences arising on liabilities see BIM39525 onwards.
  • For monetary assets see BIM39545 onwards.