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HMRC internal manual

Business Income Manual

Foreign exchange: monetary assets

A trader may hold foreign currency in a bank current account, a deposit or investment account or, more rarely, in notes or coins. Exchange differences that arise to unincorporated traders on such assets will be within the charge to tax on trade profits if the holding of the foreign currency is an integral part of the trade.

This general principle was established in early cases such as Landes Brothers v Simpson 19TC62. The appellants acted as commission agents for a company involved in exporting furs from the then USSR. The trade was conducted in US dollars and, under the agency agreement, Landes Brothers made US dollar advances to the company. They made substantial exchange gains on these advances. The High Court held these to be taxable - the gains arose from operations integral to the business.

Similar reasoning was adopted by the Court of Appeal in Imperial Tobacco Co (Great Britain and Ireland) Ltd v Kelly 25TC292. The company bought tobacco leaf in the USA and, because of its exceptionally large US dollar requirements ($45 million in 1939) it assembled the necessary foreign currency funds in advance. On the outbreak of World War Two, it was forced to sell its dollars. The large gain it made in so doing was held to be on revenue account: the dollars had been acquired for trade purposes and, in Lord Greene’s words, the gain ‘had an income character impressed on it from the very first’. 

In contrast, if the trader holds a foreign currency asset for investment or speculation, exchange gains and losses will not be trading income or expenses. Bonds, debentures or similar securities denominated in a foreign currency will almost always represent an investment of capital.