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HMRC internal manual

Corporate Finance Manual

Foreign exchange: tax rules on exchange gains and losses: how the legislation has developed

The FA 1993 regime

Before 1993

Up to 1993 there were no specific rules for taxing or relieving exchange gains or losses and they were treated in several different ways:

  • as part of the Case I profit or loss if they were on trading account
  • as part of the capital gain or loss on disposal of an asset
  • as ‘nothings’ outside the tax system altogether (nothings are gains/losses that cannot be taxed/relieved because they arose in respect of a non-trade debt, or a capital item such as a loan or non-chargeable asset).

In contrast to the tax treatment, the accounting treatment set out in Statement of Standard Accounting Practice 20 (SSAP20) was relatively straightforward with exchange gains or losses either taken through the profit and loss account or, in certain limited circumstances, taken to reserves. CFM26000 has more on the accounting treatment of foreign exchange.

FA 1993

New rules were introduced by FA 1993 which brought the tax treatment more into line with accounting practice. These changes applied only to companies. See the Business Income Manual (BIM39500) for the rules relating to unincorporated businesses.

Although the aim of the FA 1993 legislation was to bring the taxation of exchange gains and losses broadly into line with accounting practice, it did not link the computation of gains and losses directly to the accounts. The FA 1993 regime

  • applied to exchange gains and losses on monetary transactions in foreign currencies;
  • recognised exchange gains and losses as they accrued, using the translation basis only (a translation basis recognises unrealised exchange gains or losses, as against a realisation basis which recognises them only on disposal of the asset or liability);
  • permitted companies to elect to take certain exchange gains and losses to reserves
  • permitted trading companies to calculate exchange gains and losses using the appropriate local currency (this was amended in FA2000 to allow local currency accounts without the need for an election);
  • allowed companies to defer unrealised exchange gains where certain conditions were met, usually until the disposal of the underlying asset.

CFM86000 has more on certain features of the tax rules on forex and currency accounting that applied in periods before 2002.

After FA 2002

The FA 1993 regime was replaced in FA 2002 when the taxation of exchange gains and losses was assimilated into the rules on loan relationships and derivative contracts (CFM61020). Special rules apply to companies which have adopted IAS since 1 January 2005 and which use fair value accounting. These are explained at CFM61160.


Special rules were made for exchange gains and losses arising on assets and liabilities that are ‘matched’. For a definition of matching and how the special rules work, see CFM62000

Accounts drawn up in a foreign currency

FA 1993 set out rules on the currency that must be used to measure profits for tax purposes. See CFM64000.