Finance Bill 2002: EXPLANATORY NOTE
CLAUSE 79 & SCHEDULE 24: CORPORATION TAX: CURRENCY
SUMMARY
1. This clause introduces Schedule 24 and provides that it has effect for accounting periods beginning on or after 1 October 2002. The Schedule amends sections 92 to 94AB FA 1993 which deal with the currency to be used for the purposes of corporation tax. It clarifies the existing rules, so that they more explicitly follow generally accepted accounting practice.
DETAILS OF THE CLAUSE & SCHEDULE
CLAUSE 79
2. The clause provides for the Schedule to have effect for accounting periods beginning on or after 1 October 2002.
SCHEDULE 24
3. Paragraph 1 is introductory.
4. Paragraph 2 makes a minor change to section 92 FA 1996 (sterling to be used for CT purposes), so that it refers now to the new section 93A.
5. Paragraph 3 amends section 93 FA 1993. The section as it currently stands deals with the translation into sterling of cases where either:
- the accounts as a whole of a company (or its accounts of a UK branch where it is non-resident) are prepared in a non-sterling currency; or
- the company accounts using the closing rate/net investment method for part of its business when translating the results of that part into sterling.
6. The amendments remove from section 93 the parts that relate only to the second of these cases, so that section 93 applies only to the first case, and amend the sidenote.
7. Paragraph 4 inserts a new section 93A FA 1993 to deal more comprehensively with the second case. It now includes cases where the accounts of the company as a whole (or UK branch accounts) are prepared in a non-sterling currency, and the company accounts using the closing rate/net investment method for part of its business when translating the results of that part into that non-sterling currency.
Section 93A(1) replaces the old section 93(1) and gives the application of the section, where either of two conditions is fulfilled.
Section 93A(2) sets out the first condition. It is that the accounts of the company as a whole are prepared in sterling (i.e. the reporting or presentational currency is sterling) but in preparing them the results reflected in its books and records (?financial statements?) of part of the business of the company have been translated from a different functional currency using the closing rate/net investment (CR/NI) method.
SSAP 20 sets out the circumstances in which the CR/NI method is used within an entity - where there are operations which are not closely integrated with the ?home? operations.
The first condition also applies to a non-resident company trading in the UK through a branch. The company must prepare its ?return of accounts? (the accounts of its UK branch which it files with its CTSA return) in sterling in this case, but the condition is that it has a part of its business whose functional currency is not sterling, and where the CR/NI method is used to translate the results from its books and records. This is likely to be of particular relevance to financial traders such as banks and insurance companies which operate part of their business as a separate ?book? using US dollars or Euros as the currency of the book.
Section 93A(3) sets out the second condition. It is that the accounts of the company as a whole are prepared in a non-sterling currency (i.e. the reporting or presentational currency is not sterling) but in preparing them the results reflected in its books and records (?financial statements?) of part of the business of the company have been translated from a different functional currency (also not sterling) using the closing rate/net investment method (CR/NI).
The second condition also applies to a non-resident company trading in the UK through a branch. The company must prepare its ?return of accounts? (the accounts of its UK branch which it files with its CTSA return) in a currency other than sterling in this case, but the condition is that it has a part of its business whose functional currency is a second foreign currency, and where the CR/NI method is used to translate the results from its books and records. This is also likely to be of relevance to financial traders which operate part of their business as a separate ?book? using US dollars or Euros as the currency of the book.Section 93A(4) sets out the operative rule in these cases. The profits and losses of the part of the business as expressed in the relevant foreign currency are then translated into sterling or foreign reporting currency. This process will be the one that the company has used in translating the results of the part of the business using the CR/NI method. Amounts taken to reserve in accordance with SSAP 20 paragraphs 19 and 20 will not be brought into account for the purposes of Chapter 2 Part 4 FA 1996 or the derivative contacts Schedule because of section 84A(3)(c) FA 1996 (inserted by paragraph 3 Schedule 23 or paragraph 16 Schedule 26 respectively). Nor will any other amounts taken to reserve in this way be brought into account for the purposes of corporation tax (section 42 FA 1999 applies where Case I or Case V of Schedule D applies to a trade).
Section 93A(5) says that section 93A(4) has priority over section 93(4). This where a company makes up its accounts as a whole in a non-sterling currency, and has a branch for which it uses the CR/NI method in another non-sterling currency. The profits of the branch are translated into the reporting currency first, and then the results in the reporting currency are translated into sterling for corporation tax purposes under section 93.
Section 93A(6) allows various monetary limits in capital allowances legislation and the rules on hire charges for expensive cars to be expressed in their currency equivalents in working out the tax profits or losses in the relevant foreign currency.
Section 93A(7) applies where there is more than one part of the business for which the company uses the CR/NI method, and there are different currencies. Each part using a different currency is treated as a separate part, and the provisions of section 94A apply to each separately.
Section 93A(8) reflects SSAP 20 paragraph 37 and allows a ?collection of assets and liabilities? to qualify as part. This may apply to e.g. airlines which may regard each plane as a separate ?branch?, or to insurance companies where a book of US dollar business written from London will be treated as a separate part.
Section 93A(9) is the interpretation section. The terms and their definitions are taken from the previous version of section 93. CR/NI is explicitly defined in terms of SSAP 20.
8. Paragraph 5 substitutes new sections 94AA and 94AB FA 1993 for the existing section 94 FA 1993. That section until now has determined what rate of exchange is to be used when translating items other than items to which the forex legislation applies - mostly income and expenses. With the repeal of the forex legislation, the opportunity has been taken to simplify the rules and follow the principles of SSAP 20. Section 94AA applies to translations made in accounts, while section 94AB applies to translations into sterling where accounts are drawn up in a foreign currency.
Section 94AA(1) gives the main rule. Where a company draws up its accounts in sterling but they contain any items denominated or expressed in a foreign currency, (whether or not they fall within the loan relationships or derivative contracts rules) they are to be translated using the rates and at the times set out in section 94AA(4).
That section simply requires use for tax purposes of the rate used in the accounts for the relevant day, so long as it is an arm's length rate. If not, the London closing rate is to be used. An arm's length rate does not necessarily mean a rate that is the published spot rate for a day.
Section 94AA(5) indeed makes it clear that the rate used to translate an asset or liability representing a loan relationship or to translate a derivative contract may be a rate implied in such a contract, where the contract is a derivative contract whose underlying subject matter is currency, as in a forward currency contract.
Section 94AA(8), in the definition of ?relevant day? shows that a rate for a day may be an average rate for a number of days. And if the rate used in the accounts is the historic rate, that is also acceptable as an arm's length rate for the relevant day.
Section 94AA(2) gives the rule for cases where the reporting currency is not sterling (so that section 93 applies) and a translation is made in the accounts drawn up in that non-sterling currency (the relevant foreign currency) of amounts denominated in another currency (which may be sterling). Here again the rule is that the rate used in that translation must be an arm's length rate for the appropriate day, namely the day for which a translation would have been made if the accounts had been translated into the relevant foreign currency using UK GAAP.
Section 94AA(3) gives the rule where the CR/NI method is used for a part of a business. This follows section 94AA(1) and stipulates the rate used in the accounts for the relevant day (which under the CR/NI will be the last day in the accounting period for translating the balance sheet items.
Section 94AA(6) provides that the section does not overrule the special rules for CFCs - see sections 747(4B), 748(5) and 750(8).
Section 94AA(7) overrides paragraph 88 Schedule 18 FA 1998. That paragraph requires the figure determined for one year to be used for a later year. But where an amount is translated into sterling for the purposes of CT (section 92 FA 1993) for a period, using the rate set out in section 94AA(4), that does not prevent the amount expressed in foreign currency from being carried forward under section 93 to a subsequent period and being translated using a rate for that later year.
Section 94AA(8) gives definitions.
Section 94AB(1) gives the rule for cases where the reporting currency is not sterling (so that section 93 applies). Here the rule is that the rate for translation to sterling for the purposes of section 93(4) or (5) must be an arm's length rate for the appropriate day, namely the day for which a translation would have been made if the accounts had been translated into sterling using UK GAAP (section 94AB(2).
Section 94AB(3) replicates section 94AA(6). Section 94AB(4) replicates section 94AA(7) and section 94AB(5) gives definitions.
9. Paragraph 7 changes the rules for foreign currency translations where Lloyd's corporate members are concerned. They will now be subject to the rules in section 92 to 94AB in respect of their underwriting business. This does not affect the way the profits and losses from their premium trust fund are calculated.
BACKGROUND
10. The rules which determine the currency to be used for corporation tax were introduced in 1993 alongside the regime for foreign exchange gains and losses.
11. Where certain conditions are satisfied, they allow a company to draw up its accounts in a currency other than sterling, and to be taxed on the sterling equivalent of the net profit or loss. Without these rules, these companies would have to translate each separate transaction into sterling. Companies originally had to elect for this treatment, but the rules were amended in 2000 to make this treatment mandatory, and to apply it to a wider range of companies.
12. The Inland Revenue began a review of the operation of the legislation on loan relationships, financial instruments and foreign exchange gains and losses in 1999. This indicated that the legislation was in broad terms working well but that some points were causing difficulties.
13. This led to a process of public consultation which began with the publication of a Technical Note on 7 November 2000 (?Corporate Debt, Financial Instruments and Foreign Exchange Gains & Losses?). There were 28 responses.
14. A Consultative Document (?Corporate Debt, Financial Instruments and Foreign Exchange Gains and Losses?) was published on 26 July 2001. This announced Ministers? decisions in the light of the responses, sought comments on certain issues and contained illustrative draft clauses. There were 46 responses.
15. A further Technical Note (?Loan Relationships, Derivative Contracts and Foreign Exchange Gains and Losses?) was published on 19 December 2001. This invited comments on draft clauses. There were 29 responses.
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