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HMRC internal manual

Business Income Manual

Foreign exchange: gains or losses: on monetary liabilities

The House of Lords (judgment given by Lord Templeman) in Beauchamp v F W Woolworth plc [1989] 61TC542 decided that the borrowing of a definite sum for a period of five years was on capital account. The case is important as it explored the borderline between capital and revenue borrowing which is relevant to determining the treatment of exchange gains and losses arising on such loans. For such traders, where borrowing is on capital account, exchange gains are not taxable and exchange losses are not relievable. The case established broad principles to be used in deciding whether borrowing is on capital or revenue account.

Although the case involved a company and so would now fall under the loan relationship rules (see BIM39501), the principles established continue to apply to unincorporated traders.

The broad principles

First review: terms of borrowing

Firstly, the terms of the borrowings may themselves be sufficient to show that they constitute capital additions and if so it does not matter whether they were intended to be used in making payments of a capital or revenue nature. A borrowing is only on revenue account if it can be considered to be an incident of the ordinary day to day carrying on of the business activities, and that is the case only if it is:

  • ’temporary’ and,
  • ’fluctuating’ and,
  • the provision of facilities for day to day business use and is in fact so used.

See BIM39530.

Subsequent review: if in doubt: use of money

Secondly, where the borrowing terms are not conclusive then the use to which the money was put may throw some light on whether or not the borrowings are capital, see BIM39535.