CFM10511 - Currency transactions and accounting: company accounts in sterling

Exchange rate to be used

This guidance describes the post-FA 2002 taxation of loan relationships, derivative contracts and FOREX.

A company that accounts in sterling must compute its corporation tax profits and losses in sterling (FA93/S92(1)). In order to do that, it must translate

• any receipts or expenses in foreign currencies, and
• the value of any assets, liabilities and derivative contracts denominated in foreign currencies

into sterling. It doesn't, of course, have to make such translations solely for tax purposes - translating foreign currency transactions, assets and liabilities into sterling is an integral part of preparing the company accounts.

The FA 1993 FOREX regime laid down rules for determining what exchange rate should be used when translating foreign currency amounts at various times, as part of the procedure for computing exchange gains and losses for tax purposes. These rules, in FA93/S150, have now been repealed. They are replaced by FA93/S94AA(4), which simply says that for tax purposes you use whatever exchange rate the company has used in its accounts, provided that it is an arm's length rate for the 'relevant day'.

Arm's length rate means an exchange rate that might reasonably be agreed between people dealing at arm's length. It does not have to be the published spot rate for the day. If the company does not use an arm's length rate in its accounts, the London closing rate ( CFM7021) is used instead.

'Relevant day' means the day on which the translation falls to be made. If the company, in preparing its accounts, uses an average rate for a number of days, each of these days is a relevant day. And FA93/S94AA (5) makes it clear that, if the company has used the rate implied by a currency contract to value an asset or liability, that implied rate is also an arm's length rate.

There is an example at CFM10512.

Where an asset, liability or derivative contract is translated into sterling using different exchange rates at different dates, exchange gains or losses will arise. Exchange gains and losses arising on loan relationships, including debts treated as loan relationships under FA96/S100, are brought into account for tax purposes under the loan relationship rules. CFM9200+ gives full details. Where the exchange gains or losses arise on derivative contracts, they are accounted for under the derivative contract rules - see CFM13500.