CFM98258 - Interest restriction: carry forward rules: accounts prepared in a currency other than sterling

TIOPA10/S378-379, S393-395

Background

Carry forward of interest disallowance and interest allowance can become complicated where a company prepares accounts in a currency other than sterling. Here, the CIR rules in TIOPA10/PT10 must be read in conjunction with the currency rules in CTA10/PT2/CH4. Guidance on the currency rules can be found at CFM64000.

The basic rule is that the profits of a company should be calculated in sterling but there are exceptions to this rule, for example where a company both operates in a foreign currency and prepares accounts in that currency. Here, profits or losses are calculated in the foreign currency and then translated into sterling in line with CTA10/S11 (CFM64170). If a loss is carried forward to a later period, CTA10/S13 requires that the loss be retranslated when it is brought into account (CFM64380).   

This results in the loss being retranslated according to the exchange rate in the later period rather than the period in which the loss was incurred. In effect, the losses are ‘held’ and offset in the currency of origination.

There is an example of this at CFM64400.    

Carry forward of interest disallowance and interest allowance will constitute a loss for the purpose of the currency rules.

Example

A worldwide group is comprised of three UK companies who all operate, and prepare their accounts, in US dollars (USD). The group prepares an interest restriction return (IRR) for each period in sterling and translates amounts using the correct exchange rate as prescribed by CTA10/S11 and CTA10/S13.

Period ending 31 December 2019

The IRR for the period ending 31 December 2019 is prepared using an exchange rate of 1:1.2. The IRR recognises the following amounts with the USD equivalent shown in brackets:

Interest allowance                 £67m                   ($80m)

ANTIE                                     £100m                 ($120m)

Interest disallowance            £33m                   ($40m)

The interest disallowance can be carried forward for potential reactivation in a future period.

Period ending 31 December 2020

There is a decrease in ANTIE in the period ending 31 December 2020 meaning that the group has enough interest allowance to reactivate all of the previously disallowed interest. The prevailing interest rate for this period is 1:1.5. This will apply both to amounts arising in the year and amounts brought forwards. The interest disallowance must therefore be retranslated when it is reactivated to reflect the prevailing exchange rate. In particular, it would be incorrect to simply replicate the £33m figure used in the IRR for the 2019 period.  

Interest allowance                 £67m                   ($100m)

ANTIE                                     £33m                   ($50m)

Reactivation                           £27m                   ($40m)

Interest allowance c/f            £7m                     ($10m)

As with disallowed interest, if the interest allowance c/f is used in a future period, the $10m will need to be retranslated to reflect the prevailing exchange rate in that period.

There is no disallowed interest to carry forward with this having now been fully relieved.

Related guidance

When a corporation tax computation includes non-sterling amounts, CFM95610 explains how to calculate tax-interest and CFM95720 explains how to calculate tax-EBITDA.  

  

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