CFM64010 - Foreign exchange: accounts drawn up in a foreign currency: overview

Overview

Many of the entries in a company’s Corporation Tax return, particularly its trading profit, will be tax-adjusted figures taken from its accounts drawn up in accordance with either UK Generally Accepted Accounting Practice (UK GAAP) or International Accounting Standards (IAS). In most cases these accounts will be in sterling. Corporation tax is a sterling tax and is payable on the profits of companies calculated in sterling, and all the entries on a corporation tax return must be sterling.

Many companies enter into transactions involving foreign currency, importing goods or equipment from overseas, making export sales, making investments in another country which are denominated in a non-sterling currency and receiving income in that currency.

Some companies incorporated or managed and controlled in the UK, and some UK permanent establishment of a non-resident company will prepare accounts in a foreign currency, or keep records and financial statements in a foreign currency.

Until the enactment of FA 1993 there were no legislative rules setting out how a company should deal with exchange gains and losses arising from transactions in foreign currencies, and no statutory basis for translating a foreign currency profit or loss into sterling to arrive at taxable profits. FA 1993 introduced rules on the tax treatment of forex for the first time, and these were subsequently amended in FA 2000, FA 2002, FA 2004 and FA 2005.

Functional currency and presentation currency

The rules for calculating the profits for the purposes of corporation tax depend on the functional currency and presentation currency used in company’s accounts.

• The functional currency is the currency of the primary economic environment in which the company operates.
• The presentation currency is the currency in which the company’s accounts are prepared. Companies can typically choose which currency the accounts are presented in.

Further explanation of these two concepts is set out in CFM64110.

Currency for calculating CT profits

The basic rule is that the taxable profits are to be calculated in sterling. Guidance on rates to be used for currency and the rules relating to carry forward and back of losses begins at CFM64310.

Further guidance

See CFM26000 for more on the accounting standards that apply to foreign exchange. Note also that there are tax definitions of UK GAAP and IAS. For the purposes of the Corporation Tax Acts, CTA10/S1127 defines UK GAAP to include IAS, where used by a company that is permitted to do so. For the meaning of IAS as used in tax legislation, see BIM31025.

CFM64020 explains the history of the rules on currency transactions and accounts drawn up in a foreign currency (‘currency accounting’).

CFM86100 explains the rules that applied for periods beginning on or after 1 October 2002 and before 31 December 2004.