CFM64010 – Corporate Finance Manual – HMRC Internal Manual

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Insight

Many entries in a company’s corporation tax return, in particular its trading profit, will be tax adjusted figures taken from its accounts drawn up in accordance with UK generally accepted accounting practice (UK GAAP) or the international accounting standards (IAS). In most cases, these accounts will be in sterling. Corporation tax is a sterling tax and is payable on company profits calculated in sterling, and all entries on a corporation tax return must be in sterling.

Many companies enter into transactions involving foreign currencies, import goods or equipment from abroad, make export sales, make investments in another country that are denominated in a currency other than sterling and receive income in that currency.

Certain companies incorporated or managed and controlled in the UK, and certain UK permanent establishments of a non-resident company will establish accounts in a foreign currency or maintain books and financial statements in a foreign currency.

Until the enactment of the FA 1993, there were no statutory rules setting out how a company should deal with foreign exchange gains and losses arising from foreign currency transactions, and no legal basis for converting a profit or loss in foreign currencies into pounds sterling to arrive at taxable profits. FA 1993 first introduced rules on the tax treatment of forex, and these were later amended in FA 2000, FA 2002, FA 2004 and FA 2005.

Functional currency and presentation currency

The rules for calculating profits for corporate tax purposes depend on the functional currency and the reporting currency used in the company’s accounts.

  • Functional currency is the currency of the primary economic environment in which the business operates.
  • The presentation currency is the currency in which the company’s accounts are drawn up. Businesses can usually choose the currency in which accounts are presented.

A more detailed explanation of these two concepts is presented in CFM64110.

Profit Calculation Currency CT

The basic rule is that taxable profits must be calculated in pounds sterling. Advice on the rates to use for the currency and the rules for loss carry forward and back starts at CFM64310.

Additional tips

See CFM26000 for more information on the accounting standards that apply to foreign exchange. Also note that there are UK GAAP and IAS tax definitions. For the purposes of corporation tax law, CTA10/S1127 defines UK GAAP to include IAS, when used by a company authorized to do so. For the meaning of IAS as used in tax legislation, see BIM31025.

CFM64020 explains the history of rules on foreign currency transactions and accounts established in foreign currency (“foreign currency accounting”).

CFM86100 explains the rules that applied to periods beginning on or after October 1, 2002 and before December 31, 2004.

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