CFM64100 - Foreign exchange: accounts drawn up in a foreign currency: the basic rule: profits are computed in sterling

CTA10/S5(1)

Computation of profits in sterling

CTA10/S5(1) contains the basic rule that for CT purposes, except as specifically provided otherwise, profits must be computed and expressed in sterling. This is the default rule that applies to the majority of UK companies whose profits are measured by reference to sterling even though many transactions may be carried out in foreign currencies.

There are also specific circumstances in which profits or losses arising in an accounting period must be computed in sterling:

  • Where a UK company has a non-sterling presentation currency but a sterling functional currency, CTA10/S6(1) provides that profits and losses are to be computed in sterling. This is subject to any designated currency election.
  • Where a UK-resident investment company has a non-sterling presentation currency but a sterling designated currency (see CFM64500+), CTA10/S6(1A) provides that profits and losses are to be computed in sterling.
  • Where a non-UK resident company carrying on a trade through a UK permanent establishment prepares its return of accounts in sterling, it must compute profits in sterling. The return of accounts is in effect the branch accounts that form the starting point for preparing the company’s tax return.

Exceptions to the basic rule

There are exceptions to this rule where computation in a currency other than sterling is to be used. These exceptions only apply to profits or losses of the company for the period that fall to be computed in accordance with generally accepted accounting practice (UK GAAP) for corporation tax purposes. Such profits include trading profits, the profits of UK property business, amounts dealt with under the loan relationships, derivative contracts regime and intangible fixed asset regimes, and expenses of management of companies with an investment business.

The exceptions are as follows:

  • A UK company with a non-sterling presentation currency and a different non-sterling functional currency must compute profits in its functional currency and translate to sterling (S7(1)). This is subject to any designated currency election. See CFM64120.
  • Where a UK-resident investment company with a non-sterling presentation currency has a different non-sterling designated currency, it must compute profits in its designated currency and translate to sterling (S7(1A)). See CFM64500+
  • A UK company with a non-sterling presentation currency, which is also its functional currency (and accordingly neither S6 nor S7 applies) must compute profits in that currency and translate into sterling. This is subject to any designated currency election. See CFM64130.
  • Where a non-UK resident company that is chargeable to corporation tax prepares its “return of accounts” in a currency other than sterling, it computes profits in that currency and translates the result into sterling. See CFM64140.

Foreign operations

There are no special rules where a company has one or more foreign operations which have a different functional currency to that of the company as a whole. This is because accounting profits of a foreign operation will be calculated by reference to the functional currency of the operation, before being retranslated into the functional (or presentation) currency of the company. The exchange differences arising on translation will normally be initially recognised under UK GAAP as items of other comprehensive income (OCI) and consequently not taxed, see CFM64110 and CFM64140.

Other items

Where taxable or deductible amounts do not fall to be measured in accordance with UK GAAP, CTA10/S5 should apply the basic rule of requiring such amounts to be computed in sterling.

There is also an exception in S9C which may apply to the computation of chargeable gains and allowable losses on shareholdings, ships or aircraft, where a company has a non-sterling functional or designated currency. See CFM64180.

Completing the company return (CT600)

Whatever currency the company uses in its accounts, the CTSA return must always be completed in sterling. The CT600 notes tell the company how the entries in particular boxes should be computed.

Further guidance:

For an explanation of presentation currency and functional currency see CFM64110.

For details of the designated currency election see CFM64500+.