GIM5110 - Taxation of the investment return: corporate and government debt: accounting periods ending after 31 March 1996: periods beginning before 1 October 2002: exchange differences

For periods beginning before 1 October 2002, the loan relationships legislation did not cover exchange differences arising on loan relationships. FA96/SCH9/PARA4 required the credits and debits from translating or converting exchange differences to be excluded from those brought into account for Chapter 2 Part 4 FA 1996. However, any loan relationship trading gains and losses are treated in exactly the same way as Forex trading gains or losses. There was usually, therefore, no need in practice for exchange gains and losses to be separated out, except where the company had to compute an initial exchange gain on the asset for other Forex provisions such as the transitional rules.

The legislation in Chapter 2 Part 2 FA 1993, and regulations made under the powers in that Chapter, established the translation basis as the sole basis for dealing with exchange differences on those “qualifying assets and liabilities” within the scheme. Under these rules the balance sheet cost of assets and liabilities is recalculated at each balance sheet date by reference to a rate of exchange, with any differences from the last recalculation being treated as exchange gains and losses for the period. This is notwithstanding that at the time the legislation was introduced the realisation basis applied generally to the assets concerned. The instructions on the 1993 legislation at CTM72160 onwards apply to general insurance companies, subject to the modifications explained in the following paragraphs.

The legislation has effect for accounting periods beginning on or after 23 March 1995 and before 1 October 2002, and there are transitional provisions covered. These are not covered in this Manual but details can be obtained from CT&VAT, Insurance Group.