B2.123 HMRC practice on exchange rate fluctuations
Following the decision in the Marine Midland1 case, HMRC issued guidance which was subsequently superseded by SP 2/02. The loan relationships and derivative contracts legislation now applies to companies (see Divisions D1.7 and D1.8).SP 2/02 continues to be relevant to persons carrying on a trade, other than companies within the charge to corporation tax, as well as to professions and property businesses. The statement is a practical guide to the preparation of tax computations and takes account of both case law and legislation. The general rules the statement contains may be applied with modification if required by particular circumstances2.
HMRC takes the view that where exchange translation adjustments, other than those in respect of capital items, are brought into account in arriving at the accounting profit or loss, or in accordance with FRS 102 (see B2.120), they must also be brought into account for tax purposes. In addition, where the net profit or loss is translated into sterling in the accounts on the 'closing rate/net investment method', again in accordance with FRS 102, this basis must also be followed for tax purposes3.
Whether an exchange translation adjustment relates to a capital or revenue item depends on the facts and will be decided by reference to principles well established in case law (see B2.121 for a discussion of the case law). The question of whether a profit or loss on exchange on a foreign currency loan made to a taxpayer is an assessable receipt or allowable