Budget Comment 2009

Foreign denominated losses

Companies are required to compute profits and losses in sterling for the purposes of corporation tax. Where a company has an overseas branch this means that any losses it incurs must be translated into sterling before being reported within the UK corporation tax return. The exchange rate to be used is that for the period in which the loss arose, even where it is not utilised in that period.

Where losses arise in one accounting period that are carried forward (or back) to be offset against profits also expressed in a foreign currency, it is highly unlikely that the rate of exchange applied to the loss and to the profit will be the same. The exchange rate movement could result in a discrepancy between the amount of profits being relieved by losses exposing both the taxpayer and the Exchequer to exchange rate risk.

The announcement stipulates that the exchange rate used to arrive at the sterling value of the loss must be the same rate used for translating the profits that loss is utilised against. In future, losses will be carried forward in the functional currency and translated at the time of utilisation.

Companies that change their functional currency between the period in which the losses arise and the period in which those losses are offset against profits will also be affected by this announcement. Where a company changes its functional currency, losses carried forward or backwards across the change will be converted at the spot exchange rate for the date of change.

These changes will apply to all accounting periods commencing on or after 29 December 2007. It will be possible to elect to defer commencement to the first accounting period beginning on or after the Finance Bill 2009 receives Royal Assent.

Taxpayers may feel a sense of déjà vu when reading these changes. The 'new' rules are substantially a return to the legislation in force prior to Finance Act 2004.