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HMRC internal manual

Corporate Finance Manual

Deemed loan relationships: money debts: certain foreign exchange differences are excluded

Exchange gains and losses on certain money debts not allowed

CTA09/S486 prohibits exchange gains and losses on certain money debts.

Tax debts

A company with a non-sterling functional currency may show in its accounts (normally in reserves) exchange gains or losses on corporation tax and other UK taxes that are payable or refundable in sterling, or on tax provisions. Such exchange differences are not taxable or allowable.

Foreign tax

No exchange gain or loss is allowable if it arises on foreign tax unless the tax is allowed as a deduction under TIOPA10/Part 2. The exchange gain or loss should be calculated on the amount given as a deduction. This includes indirect overseas taxes for which a deduction is allowed, such as VAT.

Deductions prohibited by statute

No exchange gain or loss is allowable or chargeable on items appearing in the profit and loss account that are adjusted (or should be) in the computation under any statutory or other rule of law. This includes

  • entertaining expenditure prohibited by CTA09/S1298
  • penalties and fines prohibited by case law.

It does not include amounts prohibited only by CTA09/S53. So exchange gains and losses on capital expenditure can be loan relationship debits or credits.


A UK pharmaceutical company purchases items of laboratory glassware and other equipment from Germany, paying in euros. Exchange gains or losses therefore arise on the money debts that subsist between the time the invoices are recorded and the time when they are paid. In accordance with company policy, the company does not capitalise items costing individually less than £100. However, in its tax computations, it adds back an amount representing capital expenditure that has been charged through the profit and loss account but is disallowable for tax purposes. But exchange gains or losses associated with this expenditure are taxable or allowable. This put the company in the same position as if it had capitalised the expenditure