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HMRC internal manual

Corporate Finance Manual

Foreign exchange: matching: anti-avoidance: FA 2009: ‘one way exchange effect’: relevant and operating currency

Operating currency

The definition of a company’s ‘operating currency’ is tied to the functional currency rules at FA93/S92 to S92C - it is the currency in which it is required to prepare its tax computations.

If the arrangements involve a partnership, in which company A or a connected company is a partner, the company partner will bring into account debits or credits from a loan relationship or derivative held by the partnership. For the purposes of computing exchange gains and losses on such deemed loan relationships or relevant contracts, it is assumed that the company partner’s operating currency is the functional currency of the partnership. For example, if the partnership operates in sterling and has sterling borrowings, no exchange gains or losses will arise to a company partner from those partnership borrowings, even if the company has a non-sterling functional currency.

Relevant currency

This is the currency in which the loan relationships or relevant contracts, which give rise to exchange gains or losses included in amounts A and B, are denominated.

An arrangement may involve more than one relevant currency. Suppose for example an arrangement involves company A, whose functional currency is sterling, and company B, which has US dollar functional currency. The arrangements include dollar-denominated financial instruments, but also a sterling loan between A and B. The dollar-denominated instruments will give rise to exchange gains or losses in A (but not in B, if B is a party), while the sterling loan will give rise to exchange differences in B (but not in A). Both US dollars and sterling are relevant currencies in relation to this arrangement.

Appreciation or depreciation of currency

The legislation sets out explicitly what is meant by one company appreciating or depreciating against another by a given percentage. Currency A appreciates relative to currency B over a given period if the value of one unit of currency A, expressed in terms of currency B, is greater at the end of the period than the beginning. Thus if $1 is worth £0.60 at the beginning of a period and £0.72 at the end, the dollar has appreciated relative to sterling by 20% (0.72 - 0.60/0.60 x 100%) over the period. Depreciation of a currency is similarly defined.

Exceptionally, one currency may appreciate against the other by more than 100% in a period. It would then be mathematically impossible to apply the counterfactual currency movement assumption, because a currency cannot lose more than 100% of its value. In such a case, it is assumed that the currency appreciation is actually 100%.