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HMRC internal manual

Corporate Finance Manual

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Accounts drawn up in a foreign currency: FA 2009: carrying back non-sterling losses: example

Carry back of non-sterling losses: example

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

A company has a functional currency of US$. It has the following results:

  APE 31/12/09 APE 31/12/08
     
Trading profit $10m $20m
(Non-trading LR deficit)/Case III ($15m) $3m

During both accounting periods, the company’s results relate to numerous transactions and it is considered that the ‘appropriate exchange rate’ should be the average exchange rate for the accounting period. The relevant average £/$ exchange rates are:

Y/e 31 December 2008 - 1:1.6

Y/e 31 December 2009 - 1:1.4

The company makes a claim on 21 August 2010 to offset the maximum amount of non-trading deficit on loan relationships (‘NTDLR’) against the trading profits of the same year. This leaves no taxable profit in 2009 and there will be $5m of NTDLR remaining. This $5m NTDLR will not be translated into sterling until it is offset against profits in a different accounting period.

The company then elects to carry back the maximum amount of NTDLR against the Case III profit in 2008. As that loss will be translated into sterling at the same rate of exchange as the profit that it is offsetting, the effect is that $3m of NTDLR will be carried back. This will fully offset the $3m Case III profit.

The result of carrying back these losses would be the same, irrespective of the exchange rate in 2008. In effect, the losses are ‘held’ in the currency that they originated and offset in that currency of origination.

The trading profit of $20m in 2008 will be translated into sterling at the £/$ exchange rate of 1:1.6 resulting in a taxable profit of £12.5m.

The $2m of NTDLR not yet utilised will then be available for carry forward at 1 January 2010. This will not be translated into sterling until it is utilised in a future accounting period.