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HMRC internal manual

Corporate Finance Manual

Foreign exchange: accounts drawn up in a foreign currency: 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 (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.

For periods from 1993 to 2004, the rules related to the accounting treatment in Statement of Standard Accounting Practice (SSAP) 20. From 2005, certain companies were required, and others might choose, to apply International Accounting Standard (IAS) 21 or its UK GAAP equivalent FRS 23 in accounting for foreign currency transactions. However SSAP 20 remains in force for a large number of companies using UK GAAP. See CFM26000 for more on the accounting standards that apply to foreign exchange.

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

CFM64100 sets out the rules that apply for accounting periods beginning on or after 1 January 2005.

Note, however, that significant changes were made to the post-2005 rules for first accounting period beginning on or after 29 December 2007. CFM64300 has more details.

CFM64500 sets out the conditions needed to make a designated currency election where the accounts are drawn up in a foreign currency.

Accounts drawn up in a foreign currency pre 2005

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