CFM64410 - Accounts drawn up in a foreign currency: rates used for translation: change in tax calculation currency: overview

CTA10/S12-15

The term “tax calculation currency” for a company accounting period was introduced when the FA93 rules were re-written into CTA10, as a replacement for “operating currency”. It will be either a company’s functional currency or, in the case of a UK investment company that has made a valid designated currency election, that designated currency.

As companies can change their functional currency, it is possible that losses incurred while the company had a sterling functional currency may be utilised against profits in earlier or later accounting periods while the company has a non-sterling functional and therefore tax calculation currency.

The rules at CTA10/S12 and 13 deal with this problem by converting the sterling losses into the tax calculation currency in the period in which the loss is being offset at the point at which the change in tax calculation currency takes place. This converted loss is then translated back into sterling at the same rate as the profits against which that loss is being utilised. Consequently, the exchange risk on the value of the losses is removed by ensuring that the currency of the losses always matches the operating currency of the company. This process may sound slightly complicated but is, in practice, quite simple.

CFM64420 has further detail on how to deal with changes in tax calculation currency.

CFM64445 deals with changes in tax calculation currency where the tax calculation currency is sterling in the period in which the losses arise.

Periods before 29 December 2007

The guidance above applies to accounting periods beginning on or after 29 December 2007, unless an election was made to defer the start date of the FA09 changes to the first accounting period beginning on or after 21 July 2009, see CFM64480.

In periods beginning on or after 1 January 2005 but before 29 December 2007, once the loss for a period had been translated into sterling, that permanently fixed the sterling amount available to carry forward or back.

For details where a loss is carried forward from a period to which the old rules applied or where a loss is carried back to a period to which the old rules applied, see CFM64450.