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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Foreign exchange: accounts drawn up in a foreign currency: capital allowances

Calculating capital allowances in a foreign currency

Where profits and losses of a business are calculated in a currency other than sterling, capital allowances on plant and machinery are also calculated in that currency. This is because capital allowances are deducted in computing the profit for corporation tax purposes under CAA01/S2 (1)(b).

Where the Capital Allowances Act 2001 refers to a specific monetary limit in sterling, for example the £12000 limit for expensive cars, this should be translated into the functional currency at the spot rate applying on the date of acquisition of the car (CTA10/S7(3), S8(3) and S9(3)).

This treatment of capital allowance is unchanged from that applying for periods beginning before 1 January 2005.


In the APE 31/12/2010 the computation is as follows:

Pool b/f 1,852,728
Expenditure 543,750
Disposals 233,410
Balance 2,163,068
WDA 25% 540,767
Pool c/f 1,622,301

The Case I figure is calculated as follows:

Adjusted P&L profit 1,895,430
less CAs 540,767
Case I profit 1,354,663

Only now is the amount translated into sterling for the company tax return.

If the company translates its CT profits at the closing rate, and the exchange rate at 31/12/2010 is £1/$1.75 the entry for trading profit on the return becomes £774,093.

Other types of capital allowances

Some other capital allowances, such as Industrial Buildings Allowance and Agricultural Building Allowance, are given on a straight-line basis based on the original expenditure that qualifies for the allowance. In the case of Research and Development Allowance, the allowance will normally be 100% of the original expenditure.

Capital allowances of this kind are also computed in the currency of the accounts. The amount of the allowance will be based on the original qualifying expenditure, expressed in the currency of the accounts. If the original expenditure was in a different currency (including sterling), the expenditure should be translated into the reporting currency at the exchange rate for the day on which it was incurred - see CA11750.


Furnish plc draws up accounts to 31 December each year in dollars ($).

On the 1 September 2007, it incurs qualifying expenditure of $1,500,000 on a new factory that will qualify for IBAs.

Assume no first year allowances are due. The writing-down allowance will be 4% of $1,500,000, or $60,000, per annum. The company will, in computing its Case I profit, deduct $20,000 in the year to 31 December 2007, and $60,000 annually thereafter until the year ended 31 December 2032 when it will claim the $40,000 balance of expenditure.

If the factory is sold, the IBA balancing charge or allowance will also be computed in dollars.