CFM64120 – Corporate Finance Manual – HMRC Internal Manual


CTA10 / S6, S7

Company accounts drawn up in a presentation currency other than the functional currency

The rule of thumb is that a company’s profits should be calculated in pounds sterling for corporate tax purposes. However, some exceptions may apply to the basic rule.

A company can prepare its accounts in a presentation currency other than its functional currency. CTA10 / S6 addresses the case where the functional currency of an enterprise is the pound sterling and its presentation currency is not. S7 deals with the case where a company’s functional currency is a currency other than Pound Sterling and its presentation currency is a different currency which is also not Pound Sterling.

For the application of S6 and S7 where a UK investment firm has made a valid choice of designated currency, see CFM64500 +.

CTA10 / S6

This section applies when the functional currency is Pound Sterling but a presentation currency other than Pound Sterling is used. In this case, the tax rules take precedence over what is in the accounts, and profit and loss should be calculated by reference to the pound sterling. The company is required to calculate profit and loss in accordance with generally accepted accounting practice as if it had prepared accounts in pounds sterling.


Tychpin Ltd is a subsidiary of a company which prepares consolidated financial statements in euros. It also prepares its single entity financial statements with the euro as the presentation currency. (Note that this would simply be a matter of choice; there is no requirement under IAS or FRS 102.) However, the primary business environment for Tychpin Ltd is the UK and according to UK GAAP , the pound sterling is its functional currency. Tychpin Ltd therefore identifies the pound sterling as its functional currency in its accounts. CTA10 / S6 applies and Tychpin Ltd is to calculate its profit or loss by reference to the British Pound for UK tax purposes.

Suppose, for example, that the accounting records of Tychpin Ltd show profits of £ 1,500,000, measured in its functional currency, the pound sterling. These profits will include all foreign exchange gains or losses resulting from assets, liabilities or transactions denominated in euros. When establishing its accounts, it will translate this profit of £ 1,500,000 into euros (either at the spot rate applicable to each transaction or at the average rate for the year where this gives a reasonable approximation). It would also convert its opening and closing balance sheet into euros at the rate in effect on those respective dates.

Any exchange differences resulting from the retranslation of its opening balance sheet, its closing balance sheet and the profits for the year in euros would be OCI elements and therefore normally non-taxable.

The effect of S6 is that its tax calculations will have to start from the £ 1,500,000 sterling profit, and calculation adjustments, capital deductions, etc. will be calculated in pounds sterling.

CTA10 / S7

This section applies when a currency other than Pound Sterling is the functional currency (as identified by the Company in its accounts) and another currency, again other than Pound Sterling, is used to prepare Accounts.

The company must calculate its CT profit or loss by reference to its functional currency. The profit or loss is then converted into pounds sterling for tax purposes, normally at an average rate. For more information on which rate to use, see CFM64310 +.

Functional currency changes

When a company changes its functional currency, the exchange differences resulting from the change will normally be items of other comprehensive income. Consequently, for the accounting periods beginning on or after January 1, 2016, these amounts resulting from loan relationships and derivative contracts will not be taxable, as they are not recognized as items of income to which the CTA09 applies. / S307 (2).

Special rules apply when a currency difference arises for an investment company, which would not have arisen without a change in functional currency. These exchange differences are not taxed when the exchange gain or loss results from a change in functional currency occurring during the accounting period in which the gain or loss occurs or during the 12 months preceding the start. of this period – S328 (3B) and 606 (3B). But this does not apply when a designated company choice (CFM64500) has effect.

For the accounting periods of investment companies opened before January 1, 2016, CTA09 / S328 (2A) for credit relationships and CTA09 / S606 (2A) for derivative contracts (repealed by F (2) A15) have had a similar effect.

Exchange differences resulting from the conversion

When an enterprise converts profits from its functional currency to its presentation currency, exchange differences will arise (and will normally be recognized as items of other comprehensive income (OCI) see CFM64110). These exchange differences are ignored in the calculation of the profit or loss that occurs when the profit is calculated as if the company had established accounts in its functional currency (CTA10 / S6 (2) or S7 (2) as appropriate) . Tax calculations should be based on deemed functional currency accounts, which would not exhibit such exchange differences.

Presentation currency sterling, different functional currency

No special rules are necessary when a company has a presentation currency sterling and a different functional currency or one or more foreign transactions with non-sterling functional currencies, as the differences resulting from the conversion are elements of OIC.


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