Foreign exchange: overview
Forex gains and losses
This part of the Corporate Finance Manual covers the taxation of foreign exchange (‘forex’) gains and losses.
For an explanation of the commercial background to transactions that give rise to foreign exchange differences, see CFM12000. For guidance on the accounting treatment of transactions in foreign currencies see CFM26000.
Prior to FA 1993 there were no special tax rules to deal with exchange gains and losses on debts and currency contracts. They could be taxed as profits, or as part of the chargeable gains computation, or left out of account altogether. It all depended on the circumstances in which they arose. The effect of the new rules in FA 1993 was to bring the tax treatment more into line with accounting practice. This is discussed further at CFM61010. These rules applied for accounting periods starting on or after 25 March 1995.
In 2002, further reform took place. The special rules were abolished, and forex gains and losses were assimilated into the normal rules on loan relationships (CFM30000) and derivative contracts (CFM50000), with effect for accounting periods beginning on or after 1 October 2002.
The basic rules on loan relationships or derivative contracts apply to exchange differences
CFM61000 explains the application of the basic tax rules on exchange differences. In the majority of cases, there will be no need for any computational adjustments for exchange gains and losses. See CFM61150 for a summary of the circumstances in which you may need to consider the treatment of exchange gains and losses.
Introduction of New UK GAAP
New UK GAAP applies to all periods of account starting on or after 1 January 2015. The biggest change, with regards forex, is that SSAP 20 has been withdrawn and can no longer be applied. This previously allowed a company to take exchange differences on a loan to reserves (instead of to profit or loss) where the loan was ‘matched’ with the company’s net investment in an overseas subsidiary. Under New UK GAAP, such treatment is only allowed in consolidated accounts. There is further guidance on the differences between SSAP 20 and New UK GAAP at CFM26015.
Moving forwards, companies will be expected to use IAS 21, FRS 101 or FRS 102. These standards are very similar in how they deal with forex.
Forex matching (net investment hedging)
The major area in which special rules apply to exchange differences is where a company uses foreign currency liabilities to hedge the risk of currency fluctuations affecting the value of foreign currency assets, for example its net investment in an overseas subsidiary. As above, SSAP 20 was previously available to companies when accounting for such exchange differences and CFM62000 explains how this worked and the resulting tax treatment. The Disregard Regulations preserve this treatment once International Financial Reporting Standards or New UK GAAP are adopted.
Currency transactions and accounts drawn up in a foreign currency
CFM64000 explains rules introduced by FA 1993 on how companies (and permanent establishments of non-resident companies) which prepare accounts in a currency other than sterling should present their tax computations. This is a separate issue from how exchange differences in the company’s accounts should be taxed or relieved, but is included for convenience in this guidance. Significant changes were made to these rules for accounting periods beginning on or after 29 December 2007. These changes are described at CFM64300+. CFM64500+ provides guidance on making a designated currency election where the accounts are drawn up in a foreign currency.
Anti-avoidance rules relating to forex are mostly contained within the main body of the loan relationships legislation (CFM38500). Certain anti-avoidance rules relating to forex matching are described at CFM63000.
Old rules and transitional provisions
CFM86000 explains the rules that applied to exchange gains and losses and accounts drawn up in a foreign currency between 2002 and 2005, and transitional provisions that applied to matching relating to the change from the FA 1993 regime to the FA 2002 regime.
Forex and non-corporates
This guidance does not apply to individuals (including individual partners in a partnership) or trusts. Statement of Practice 2/02 (which supersedes SP1/87) sets out HMRC’s views on the tax treatment of foreign exchange gains and losses in the accounts of unincorporated businesses. Guidance is in the Business Income Manual at BIM39500.