This guidance describes the post-FA 2002 taxation of loan
relationships, derivative contracts and FOREX.
Mannwel BV is a Netherlands bank with a branch in the UK. The
branch keeps its financial records in euros. However, it makes
loans to customers in sterling, US dollars and Swiss francs (as
well as euros), and transacts other business with customers in
these currencies. It accounts for its sterling, US dollar and Swiss
franc 'books' as separate parts of its business. It incorporates
the results of these operations into the financial statements of
the UK branch using the closing rate/net investment method. The
profit and loss account of each part business is translated at an
average rate for the year.
The company's accounting date is 31 December. The UK branch
is preparing its CT return for the year ended 31 December 2006.
In the year ended 31 December 2005, the UK branch traded at a
loss, and there are Case I losses of €500,000 brought
forward.
In the year ended 31 December 2006, the separate trading
books and the main branch business results have the items of income
shown in the following table. Average exchange rates for 2006 are
also shown.
| Business or part business | Taxable income (loss) | Average exchange rate |
| Main (euro) business | Case I (before CAs)
Capital allowances Non-trading loan relationship debits | €1,200,000
(€ 800,000) ;(€2,000,000) |
| €1 = £0.600 | US dollar part business | Case I
NT LR credits |
| $3,000,000
$ 50,000 | $1 = €1.100 | Swiss franc part business |
| (SFr 50,000); | SFr 1 = €0.660 * |
Translate US dollar and Swiss franc branch profits and losses
into euros, using the exchange rate used in the accounts -
FA93/S93A (4). The sterling branch profits are not translated into
euros - FA93/S93A does not apply here, because the branch financial
statements in point are not prepared in a currency other than
sterling.
Profits mean income items but not chargeable gains. Losses
includes such items as Case I losses, loan relationship debits and
management expenses, but not CG losses (FA93/S93A (9)).
Translation into euros gives:
| US dollar part business | Case I, €3,300,000; NT LR credits €55,000 |
| Swiss franc part business | Case I, (€33,000) * |
Apply the rules in FA93/S93 (4). Compute profits and losses in
euros, and then translate them into sterling, using the rate that
would be appropriate under GAAP for translating the euro accounts
into sterling.
The euro computation is therefore:
| € | € | |
| Case I - main business | 1,200,000 | |
| US dollar business | 3,300,000 | |
| SFr business | ( 33,000) | 4,467,000 |
| Less capital allowances | ( 800,000) | |
| Less losses b/f | ( 500,000) | |
| Net case I | 3,167,000 | |
| NT LR credits | 55,000 | |
| NT LR debits | (2,000,000) | |
| Net debits | (1,945,000) * |
Translated at the average rate for the year (€1 =
£0.600), this gives:
Case I, £1,900,200
NT LR debits, £1,167,000
Compute the sterling profit to go into the CT600 return. The profits of the sterling branch, and any chargeable gains, are added at this stage:
| £ | £ | ||
| Case I - from euro computation | 1,900,200 | ||
| Sterling branch | 750,000 | 2,650,000 | |
| NT LR debits | (1,167,000) | ||
| NT LR credits (from sterling branch) | 100,000 | (1,067,000) | |
| Chargeable gains (say) | 217,000 | ||
| Profits chargeable to CT | 1,800,000 * |
