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HMRC internal manual

Business Income Manual

Foreign exchange: business uses the ‘offset method’

Where a business has an investment in an overseas entity (for example, shares in an overseas company) which is hedged by borrowing, SSAP20 allows the investment to be treated as a monetary asset. Gains or losses on the asset are taken to reserves, as are the corresponding exchange differences on the liability to the extent that they are matched, or covered, by the exchange differences on the asset. This is sometimes referred to as the ‘cover method’ or ‘offset method’ of accounting - there is more detail at CFM62010 onwards.

Exchange differences taken to reserves should not be regarded as taxable or allowable in computing trade profits. Any ‘surplus’ gain or loss on the liability that is taken to profit and loss account will in any case normally be on capital account if the borrowing was incurred to finance the overseas investment.

FRS 23, FRS 102, FRS 101 and IAS do not permit investment in an overseas entity to be hedged in this way in an entity’s accounts (although it is permitted in the consolidated accounts of a group of companies). Although ‘forex matching’ is nevertheless permitted for Corporation Tax purposes (see CFM62600 onwards), these rules do not apply to Income Tax.