This guidance describes the post-FA 2002 taxation of loan
relationships, derivative contracts and FOREX.
A company (including a UK branch of a non-resident company)
that prepares accounts in a non- sterling currency must follow the
rules outlined in
CFM10526 to arrive at a sterling profit
figure. In this process, it will have to translate its overall
profit or loss, expressed in the foreign currency, into sterling.
It may also have to calculate the foreign currency equivalent of
fixed sterling amounts in the Taxes Act (see
CFM10530).
FA93/S94ABsets out the rule for the exchange rate to be used
in this case. It is an arm's length exchange rate for the
appropriate day. This means the rate for the day that would have
been used if the company accounts were translated into sterling in
accordance with UK GAAP.
If a company maintaining accounts in a non-sterling currency
is part of a group that accounts in sterling, the subsidiary's
accounts must be translated into sterling in order to be
consolidated into the group accounts. SSAP20 currently governs how
this should be done (see
CFM8026). The subsidiary company's profit
and loss account will normally be translated at either the closing
rate (the spot rate for the last day of the accounting period) or
an average rate for the period.
Where there is, as part of a consolidation process
the company should use the same exchange rate to translate its
CT profits or losses from foreign currency to sterling. Nothing in
the statutory definition of appropriate day prevents an average
rate being used for this purpose.
Where there is no such actual translation, the company should
use the exchange rate that would be appropriate, in accountancy
terms, if such a translation were to take place. HMRC staff should
not normally need to query the company's choice of a rate, provided
that it is an arm's length rate and is applied consistently.
