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HMRC internal manual

Corporate Finance Manual

Old rules: forex and accounts drawn up in a foreign currency: pre 2005: part of business accounts in a foreign currency

Part of a business: accounting for the sterling equivalent

This guidance applies for accounting periods between 1 October 2002 and 1 January 2005

FA93/S92 states the basic rule that for CT purposes, profits and losses must be computed and expressed in sterling. But this is subject to FA93/S93A. These provisions allow a company to compute the profits and losses of part of a business, including:

  • taxable profits (trade or non-trade, but excluding capital gains)
  • allowable losses (including losses from property businesses and management expenses, but not CG losses), and
  • capital allowances

in the functional currency of that part of the business.

This will apply where the company uses the closing rate/net investment method (CFM26000) to translate the part business results, which are based on non-sterling financial statements, into the currency in which the company as a whole prepares its accounts.

The main effect of the FA93/S93A provisions is that the net result of the part business, including any capital allowances attributable to that part, is translated into sterling as a single amount.

Exchange gains and losses from applying closing rate/net investment method

The closing rate/net investment method means that exchange gains and losses arising on the translation of the net investment in the branch are taken to reserves, rather than to profit and loss account. CTA09/S328(3) ensures that such exchange gains and losses are ignored for CT purposes.

What happens if the company doesn’t use the CR/NI method?

In certain cases the company may regard the part business as being no more than an extension of its own business, and will use the temporal method (CFM26270) to consolidate its results. FA93/S93A has no application in such cases. The company accounts will reflect the transactions of the part business as part of the company’s overall transactions. The company can compute its CT profits or losses without the need for any special rules.