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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Foreign exchange: accounts drawn up in a foreign currency: the rules from 1993 to 2004

History of the rules for accounts drawn up in a foreign currency

FA 1993

Before FA 1993, there was virtually no statute law on foreign currency issues. Case law had established that corporation tax returns must be made in sterling, and some guidelines were available from case law (particularly Pattison v Marine Midland (57TC219)), but disputed issues remained.

FA 1993 introduced specific rules on forex, laying down the general rule that a company must compute its trading profits in sterling, and giving rules for the computation of exchange gains and losses on monetary assets, including the exchange rate to be used on translation. A local currency election could be made to compute trading profits of a company that did not account in sterling, or the profits of a trade carried on by an overseas branch, in the local currency, and translate it into sterling. The election did not apply to capital gains, capital allowances or non-trade profits, and investment companies could not make an election.

FA 2000: periods beginning on or after 1 January 2000 and ending after 20 March 2000

The rules in FA 1993 were amended in FA 2000, for APs beginning on or after 1 January 2000, and ending after 20 March 2000. Elections were abolished and replaced with a mandatory system. Where profits were calculated in a foreign currency in accordance with UK GAAP, a company or a permanent establishment of an overseas company had to use this currency to calculate profits and losses for tax purposes. The new rules were also extended to investment companies.

Capital allowances and amounts carried forward such as trading losses and management expenses were now calculated in the foreign currency.

FA 2002: periods beginning on or after 1 October 2002

For APs beginning on or after 1 October 2002, FA 2002 aligned the local currency rules more closely to accounting practice, setting out the exchange rate to be used in translating any foreign currency transaction, and dealing explicitly with the tax consequences of the consolidation of the results of part of a business in a foreign currency into a company’s accounts.

FA 2002 also assimilated exchange gains and losses on monetary items into the loan relationship and derivative contract rules.

FA 2004 and FA 2005: periods beginning on or after 1 January 2005

The rules were substantially amended in FA 2004 to cater for the advent of International Accounting Standards. CFM64030 explains these changes in more detail.