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HMRC internal manual

Business Income Manual

From
HM Revenue & Customs
Updated
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Foreign exchange: foreign currency accounts

A UK resident who carries on a trade wholly abroad may have no real economic exposure to the sterling exchange rate. For example, someone trading exclusively in France might buy and sell in euros, manage the business through a euro bank account, and so on, without ever converting money into sterling. Accounts prepared in euros would, in such a case, give a true and fair view of the state of the business.

Where a trader prepares foreign currency accounts, and the currency concerned is their functional or local currency - the currency of the primary economic environment of the business - the tax computations should take as their starting point the foreign currency profit or loss, translated into sterling at either the closing rate for the period of account, or an average rate.

Capital allowances, trading losses carried forward, and other statutory reliefs and charges must be computed in sterling.

Similar considerations apply to a business that is partly carried on through an overseas branch. (‘Branch’ here follows the wide definition in SSAP20 - any collection of assets and liabilities denominated in a foreign currency can constitute a branch.) If the branch profits or losses are incorporated into the sterling accounts of the business using the closing rate/net investment method (this is explained at CFM26210 onwards), the same method should be used for tax purposes. Note that FRS 102, FRS 101 and IAS 21 do not define branch but branches fall within the scope of Foreign Operations within these standards and the accounting, subject to the differences noted in BIM39510, is comparable.