CFM64420 - Accounts drawn up in a foreign currency: rates used for translation: change in tax calculation currency: rules

CTA10/S12,13

Change in tax calculation currency: rules

The term “tax calculation currency” for a company accounting period was introduced when the FA93 rules were re-written into CTA10, as a replacement for “operating currency”. It will be either a company’s functional currency or, in the case of a UK investment company that has made a valid designated currency election, that designated currency.

The basic rule, that losses originating in a non-sterling currency that are carried forward or back are translated into sterling at the same exchange rate as the profit that is being offset, does not work once a company changes its operating currency.

This rule means that, in effect, losses are carried forward or back in the currency in which they originated but how would you go about offsetting, say, US dollar losses against a Euro profit in a later accounting period?

The legislation deals with this by translating the loss, in whatever currency it originated in, into the operating currency of the company when the loss is offset.

Carry back losses

Where losses are carried back, the effect of rule 2 or 3 in S12 is that the translation into the previous tax calculation currency should take place at the spot rate on the last day of the last accounting period with the previous tax calculation currency. Rule 2 applies where the original tax calculation currency was sterling and the later tax calculation currency is not sterling. Rule 3 applies if neither calculation currency sterling.

CFM64430 has an example of how a change in operating currency is dealt with when losses are carried back.

Carry forward losses

Where losses are carried forward, the effect of rule 2 or 3 in S13 is that the translation into the new tax calculation currency should take place at the spot rate on the first day of the first accounting period during which the new tax calculation currency is used. Rule 2 applies where the original tax calculation currency was not sterling, but the later tax calculation currency is sterling. Rule 3 applies if neither tax calculation currency is sterling.

CFM64440 has an example of how a change in operating currency is dealt with when losses are carried forward.

Conversion into non-sterling currencies

Where the operating currency is not sterling during the period when the profit is offset by a loss, the converted loss will be translated into sterling at the same exchange rate as the profit that it is offsetting (as per the normal rules for offsetting brought forward or back losses).

Conversion into sterling

Where the operating currency is sterling during the period when the profit is offset by a loss, the converted loss will require no further translation (the loss is now in sterling and will be offset against sterling profits).

Periods before 29 December 2007

The guidance above applies to accounting periods beginning on or after 29 December 2007, unless an election was made to defer the start date of the FA09 changes to the first accounting period beginning on or after 21 July 2009, see CFM64480.

In periods beginning on or after 1 January 2005 but before 29 December 2007, once the loss for a period had been translated into sterling, that permanently fixed the sterling amount available to carry forward or back.

For details where a loss is carried forward from a period to which the old rules applied or where a loss is carried back to a period to which the old rules applied, see CFM64450.