OT22120 - Interest and Financing

Accounts and exchange

Oil is a product sold on an international market for dollars. As such, the future income stream of a producing company is dollar based and a natural economic hedge is achieved if borrowing is in dollars rather than sterling. Furthermore a significant number of the UK oil producers are companies with US parents and may be US incorporated. Thus some producers present accounts in dollars.

If dollar accounts are produced in support of sterling PRT claims this can give problems in completing PRT/accounts reconciliations. There are a small number of UK companies with UK parents who present accounts in dollars.

The legislation in FA93 starts on the premise that accounts should be presented in sterling. FA93/s93 does however provide that Regulations may be made enabling companies to use a different currency where this is the currency of its primary economic environment.

Where a company carries on a ring-fence trade which consists partly of oil extraction activities and partly of gas extraction activities, then it may elect for different currencies for different parts of the trade - even though both parts may be carried on in the UK (FA93/s94A and Regulation 4(2)(b) Local Currency Elections Regulations 1994).

The time limit for such an election is 92 days from the commencement day of the company or 92 days from the date it became chargeable to Corporation Tax. Otherwise the election has effect from the start of the accounting period which begins on or after the date on which the election is made.

Inspectors are reminded that no extension is available for any of the time limits for foreign exchange elections and transitional reliefs.

If the allowable interest on a loan has been restricted under the thin capitalisation provisions a similar proportion of any exchange loss claimed on the principal will require to be restricted. The full guidance issued by FID should be consulted.