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HMRC internal manual

Corporate Finance Manual

Accounts drawn up in a foreign currency: FA 2009: background

FA 2009 changes: background

This guidance applies to accounting periods beginning on or after 29 December 2007

A result of the previous regime for carrying forward or back losses that were computed in a non-sterling currency was that those losses would be carried forward or back in sterling. This led to foreign exchange exposure to both the company and the Exchequer as to the value of those losses during the period in which they are offset. This is best demonstrated through the following examples:

Example 1

A company has a $US functional currency and makes a tax adjusted trading loss of $6m in the year ended 31 December 2006. The average £/$ rate for the year ended 31 December 2006 is 1:1.5. Therefore the $6m loss is translated into £4m.

In the year ended 31 December 2007 the company makes a $6m tax adjusted trading profit. The company may therefore expect the $6m loss in 2006 to offset the $6m profit in 2007. However, if there has been any movement in the £/$ exchange rate, this will not be the case.

Say the average £/$ exchange rate in 2007 is 1:1. The profit in 2007 will be translated into sterling as £6m. The trading loss carried forward from 2006 is £4m and so a profit of £2m will be brought into charge. Consequently, a $6m loss in one year is not able to offset a profit of $6m in a later year. The company has chargeable profits where there has been no overall economic taxable profit.

An opposite movement of exchange rates can have an opposite impact, as the following example demonstrates:

Example 2

The results are the same as above, but the £/$ exchange rate in 2007 is 1:2. The profit in 2007 is therefore translated into £3m and so, after offsetting the brought forward loss of £4m there is still a loss of £1m to be carried forward for offset against future profits.

The above examples demonstrate how, where a company computes its profits and losses in a currency other than sterling, any losses carried forward or back will be subject to exchange rate movements and hence expose the company and the Exchequer to foreign exchange risk.

The changes in FA2009 seek to remove this exchange risk.