Foreign exchange issues

Produced by Tolley

The following Corporation Tax guidance note Produced by Tolley provides comprehensive and up to date tax information covering:

  • Foreign exchange issues
  • Overview of foreign exchange provisions
  • FX differences v fair value movements
  • Basis of taxing FX movements on monetary assets and liabilities
  • Exchange rates
  • Exceptions to the general rule ― overview
  • Reliefs and exemptions
  • Anti-avoidance measures
  • Connected party debt
  • Non-arm's length loans
  • More...

Overview of foreign exchange provisions

Foreign exchange (FX) movements are generally taxed following the rules applicable to the underlying income, expenditure, asset or liability on which they arise, broadly as follows:

Capital assetsOn a realisation basis (ie on disposal) following the rules applicable to the taxation of chargeable assets ― see the Calculation of corporate capital gains guidance note
Capital liabilitiesOutside the scope of corporation tax
Monetary assets and liabilitiesAs income, on the basis on which they are recognised in the accounts, under the regimes governing loan relationships, relevant non-lending relationships, or derivative contracts in CTA 2009, ss 298–710 (Pt 5–7) ― see the What is a loan relationship?, Taxation of loan relationships and Derivative contracts guidance notes for more detailed background information regarding these regimes

The remainder of this guidance note focuses on FX movements arising on monetary assets and liabilities. Associated HMRC guidance notes can be found in CFM61000.

FX differences v fair value movements

FX differences are translation differences and should not be confused with fair value movements, as the tax treatment applicable to each is not always the same.

An FX gain / loss is the difference between the carrying value of an asset / liability denominated in one currency when translated into a second currency at two different points in time. Items are typically (re)translated when the transaction is entered into or settled, and at any balance sheet dates in between. Examples of how to calculate FX movements are provided in CFM61040.

A fair value gain / loss arises when the fair market value of an asset / liability changes and its balance sheet carrying value is adjusted accordingly, especially under the principles of IFRS and modified UK GAAP.

In practice the term ‘revalued’ is often used interchangeably to mean either process, but it is important to distinguish them when evaluating the availability of some tax reliefs.

Where companies follow an amortised cost (or accruals) basis of accounting, translation differences are identified as

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