B2.121 Recognition as income or capital for tax purposes
It is a general principle that where an exchange profit or loss arises in the course of trading operations, it is taxable as trading income. Where, however, there is a transaction in foreign exchange connected with an investment of capital, the profit or loss on exchange is not regarded as part of trading operations, but may nonetheless be taken into account for capital gains purposes1. For example, a forward purchase of foreign currency intended for application on capital account may give rise to a gain or loss within the capital gains tax system. However a mere repayment as between a debtor and the original creditor of a debt incurred in currency terms, which is not in the course of trading operations, nor a chargeable capital gain2, is not liable to tax, nor is any profit or loss on exchange arising from it.
Whether a currency transaction does or does not arise in the course of trading should be determined in the light of the particular contractual arrangements. HMRC provides guidance in their Manuals on the various criteria which they consider in classifying transactions as either revenue or capital3, which has also been the subject matter of various cases, as discussed below:
In Landes Bros v Simpson4, a profit of £16,446 was realised on dollar advances by fur commission agents to their principals. This profit was held to arise directly in the course of the firm's business, and was therefore assessable as a