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Must prior year losses be re-calculated?

Doing accounts in Euros - eliminates exchange gain but what about the b/f losses?

UK company trades mainly in Euros and has high debtors due from Italian company under common control. Cue the Brexit vote, pound slumps and suddenly we have a huge exchange rate gain. Client unhappy to pay tax on a paper gain, despite previous paper losses contributing greatly to b/f tax losses.

Proposed solution - do the accounts in Euros under s469 of the Companies Act. Convert opening balances to Euros at 2015 rate and do 2016 sterling P&L items at average rate. The gain disappears and underlying profit is only slightly higher when converted to sterling for the CT600. The credit appears to have taken up residence in the director's loan a/c, which was previously recorded in sterling.

I was worried about the tax treatment but according to HMRC archived content (Frequently Asked Questions about the Euro) there is no need to work out what exchange rate gains and losses would have arisen had the accounts been in sterling. You simply translate the Euro accounts to sterling at the closing rate. Seems too good to be true somehow but that's what it says.

Only trouble is, what about tax losses? Instinct told me to go back over them and strip out the currency gains/losses, but on second thoughts the change is only effective from 1/1/16, so why disturb previous tax returns?

From a tax perspective, it seems unnatural to lock in currency losses on the CT600 and then start doing accounts in Euros when the rate moves against you. Can that really be right?


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By Ruddles
20th Sep 2017 11:09

Haven't time to get my head round this, but when preparing accounts in Euros do you not end up with foreign exchange differences in respect of Sterling liabilities, eg credit DLA?

And are you not supposed to translate Euro profit for the year to Sterling at the average rate?

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By cfield
to Ruddles
20th Sep 2017 14:40

Thanks Ruddles. Yes indeed, not a simple scenario. The only sterling figures are directors fees and accountancy fees, so the foreign exchange differences will be much smaller if the accounts are done in Euros.

Yes, you're right about the average rate, as prescribed by CTA 2010 S11. I was slightly misled by the archived content which suggested it might be either the closing rate or the average rate, but clearly CTA 2010 is the guiding authority, which is obviously why the old guidance has been archived.

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20th Sep 2017 12:15

CA 2006, s. 469 simply permits THE TRANSLATION of the accounts into Euros, and is, in any event, irrelevant.

You need to read CTA 2010, ss 5-8, and consider what the functional currency is under accounting standards (not least because it probably needs to be disclosed).

If you can validly use Euro accounts for tax purposes, then there's no adjustment to brought forward losses, but there will be a net credit or debit adjustment to the current year's profit under CTA 2009, s 181.

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By cfield
to Portia Nina Levin
20th Sep 2017 14:28

Thank you Porsche 911 for as ever hitting the nail bang on the head and highlighting the relevant sections in the tax code. This is exactly what I needed to know but was too lazy, busy or unschooled in tax legislation to find out for myself.

The dominant currency is definitely Euros so section 8 applies. This steers me to section 11 which tells me to translate the P&L at the average rate for the year or on a just and reasonable basis according to the spot rates for each transaction (which I have on the VAT returns).

A bit puzzled at your last passage though, as section 13 applies to b/f losses calculated in sterling, and Rule 3 tells me to convert them to Euros at the opening rate on 1/1/16 and then convert back to sterling at the same average rate as prescribed under section 11. In that case, there would be an adjustment to the sterling value of b/f losses, if not the losses themselves.

Also not sure about CTA 2009 s181, as s180 says it only applies if there's been "a relevant change of accounting approach" and in this case the accounting treatment is unchanged. It is only the reporting currency that will change.

On a more practical level, I use Taxfiler and it only seems to cope with sterling accounts. Not a problem for filing the accounts as I can use WebFiling instead which allows you to choose the currency, but for the CT600 I would have to either translate all the figures in the accounts at the average rate (not correct for the balance sheet) or use the closing rate for the balance sheet and end up with an exchange gain, which is exactly what we're trying to avoid (although it would be a much smaller one as the average rate was only about 1.22 compared to 1.17 for the closing rate and 1.36 for the opening rate).

Section 11 only prescribes translating profits and losses into their sterling equivalents, not the whole accounts, but if the tax software won't let me attach the accounts in Euros, as HMRC allow, then there's no other choice.

It might be wise to write to HMRC anyway and notify them that the accounts were done in Euros and only sent to them in sterling due to the limitations of the software. Otherwise, there might be a future query on the gain being smaller than it would have been if the accounts really had been done in sterling.

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