Some UK companies and most permanent establishments of overseas
companies have prepared accounts in currencies other than sterling
for years. Commonly the US dollar has been used and recently some
companies active in the Euro zone have adopted the Euro as their
functional currency.
Before the enactment of FA93 there were no legislative rules
for dealing with accounts prepared in a foreign currency. The view
was taken that companies operating in the UK should use sterling to
compute their profits. In particular, there was no statutory basis
for translating a foreign currency profit or loss into sterling to
arrive at taxable profits, although such treatment was often given
to trading companies by concession.
FA93 made a major change in conjunction with the introduction of
the FOREX regime. FA93/S92 to 94 allowed a company or a permanent
establishment of an overseas company to elect to present foreign
currency accounts of its trading profits for tax purposes provided
it could satisfy the conditions and the time limits required for a
“local currency election”. The rules for elections were
in regulations at SI1994/3230. The company’s basic trading
profit could then be translated into sterling. Capital gains,
capital allowances and all non-trade profits were, however,
calculated in sterling. Investment companies could not make an
election.
For guidance on this regime see CTM76205.
The rules in FA 1993 were amended in FA 2000. Elections were
abolished and replaced with a mandatory system. Where profits were
calculated in a foreign currency in accordance with UK GAAP, a
company or a permanent establishment of an overseas company had to
use this currency to calculate profits and losses for tax purposes.
The new rules were also extended to investment companies.
Capital allowances and amounts carried forward such as
trading losses and management expenses were now calculated in the
foreign currency. For guidance on this regime see CTM76010.
Changes were made following the repeal of the old FOREX regime
in FA 1993 mainly to align the local currency rules more closely to
accounting practice. A new FA1993/S94AA also governed the exchange
rate to be used in translating any foreign currency transaction in
accounts replacing provisions previously in the FOREX legislation.
It also dealt explicitly with the tax consequences of the
consolidation of the results of part of a business in a foreign
currency into a company’s accounts.
If you are dealing with a period of account beginning between
1 October 2002 and 31 December 2004 inclusive, you should look at
the guidance at
CFM10510 onwards.
CFM10555 summarises the position for
periods beginning on or after 1 January 2005, and there is detailed
guidance at
CFM10560 onwards.
