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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: computing the sterling profit of part of a business

Part of a business: computing the sterling profit

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

A company (or UK branch) using the closing rate/net investment method to consolidate the results of a part business will translate the profit and loss account of the part business into its reporting currency at either the closing rate for the accounting period, or an average rate for the period. It translates the balance sheet of the part business at the closing rate. Closing rate means the spot rate at the last day of the accounting period. Any exchange gains and losses are taken to reserves.

In the situations set out in FA93/S93A(2), the computation of taxable profits mirrors the accounts:

  • You compute the Corporation Tax profits and losses of the part business, expressed in the relevant foreign currency, and then translate the result into sterling (FA93/S94A (4)). But this does not apply to capital gains.
  • The exchange rate to be used is the exchange rate that the company uses in its accounts to translate the part business profit or loss, provided that this is an arm’s length rate. So if it uses the closing rate in its accounts, it will use the closing rate for tax purposes; if it uses an average rate, it will use the same average rate for tax purposes (FA93/S94AA(3) and (4)).

If the company does not use an arm’s length rate in its accounts, the London closing rate is used instead. CFM86220 explains what is meant by an arm’s length rate.

Exchange gains and losses taken to reserves are ignored for tax purposes.

The company may have to translate various fixed sterling amounts that occur in the Taxes Acts when working out the profits and losses of the part business in the relevant foreign currency. For example, if the company has a branch accounting in US dollars, and the branch buys an expensive car, writing-down allowances on the car will need to be restricted to the dollar equivalent of £3,000 per annum. The same rule about what exchange rate to use applies here. If in preparing its accounts the company uses an arm’s length exchange rate for the relevant day, you use that exchange rate; otherwise you use the London closing rate for the relevant day.

More than one part of the business/currency

Where a company has more than one part business, and different currencies are used, they are to be treated as different businesses for the application of these rules (FA93/S94A (7)). The profits or losses of each are translated separately into sterling before being added together to give a total figure. See the example at CFM86180.