A UK company doing business overseas is likely to have to deal with transactions in foreign currencies, leading to foreign exchange movements where the transaction is translated into a sterling equivalent in the accounts.

Foreign exchange gains and losses can also arise where the accounts of a branch are consolidated with those of the UK company, where the branch accounts are prepared in a different currency and no election has been made to exempt the branch profits and losses from UK tax (see the Foreign branch exemption ― overview guidance note). For corporation tax purposes, the basic rule is that the profits of a UK company, including those arising overseas or in a permanent establishment (PE), must be computed and expressed in sterling.

It should be noted that the foreign branch exemption rules are subject to the Government’s proposed amendments set out in its policy paper, draft legislation and explanatory note, which provide for the exemption to become mandatory for UK resident companies.

There are exceptions where profits and losses are calculated in accordance