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HMRC internal manual

General Insurance Manual

Taxation of general insurance: annual accounting: currency accounting: general rules: APs beginning before 1 January 2005: sections 93 and 93A FA 1993

Many general insurers, particularly those operating in the London Market (see GIM1230), have substantial amounts of business denominated in US dollars and other currencies, even though the operations are carried on in the UK. Others have overseas operations conducted through permanent establishments. There are two possible responses to this:

  • The accounts of the company as a whole may be drawn up in a foreign currency. This is more likely if the company is incorporated outside the UK, when it will normally use the currency of the territory in which it was incorporated, but a UK company may also do this if all its business is currency business.
  • The accounts as a whole are drawn up in sterling but the operations, and the assets and liabilities forming them, will be regarded as a ‘branch’. For accounting purposes, a branch includes a collection of assets and liabilities denominated in a foreign currency where the assets and liabilities in that currency are broadly matched (see SSAP 20 paragraph 25 and ABI 2005 SORP paragraph 219 last sentence). There may be more than one such branch, as well as actual overseas branches.

Accounts as a whole drawn up in a currency other than sterling

In this case FA93/S93 applied to compute the profits of the business - the Corporate Finance Manual at CFM10520 gives details. The general rule was that the currency profit as shown in the accounts is tax adjusted in the usual way, and losses and other amounts brought forward which may be set against the profits of the year were deducted in their currency amounts. The net amount was translated into sterling at the closing rate (or other appropriate rate).

A company may have ‘branch’ operations (see GIM10050) or other transactions denominated in a currency (which may be sterling) which is not the accounting currency. These transactions were accounted for tax purposes by translating them into the accounting currency using the appropriate exchange rates and dates, before the net result was translated into sterling. See CFM10516.

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Accounts as a whole drawn up in a currency other than sterling with a branch operation in a foreign currency

In this case FA93/S93A applied to compute the profits of the branch operations - see CFM10513. The general rule was that if the profits of the branch have been translated in the accounts in accordance with the closing rate/net investment method (the closing rate translates the currency profit at the rate prevailing at the closing balance sheet date or at the average rate for the year) and the opening and closing net investment in the branch (the excess of the branch assets over liabilities) are translated at the closing rate with any exchange differences taken to reserves, this treatment is respected for tax purposes.