Paymaster General Dawn Primarolo announced today that the Government would bring forward legislation in the next Finance Bill to improve the tax treatment of companies which draw up their accounts in a foreign currency. At present the UK tax system normally requires taxable profits to be computed in sterling, although a company is allowed to elect to have its taxable trading profits based on the profits computed in the foreign currency. In future, if the accounts are drawn up in a foreign currency the taxable profits will usually be based on the foreign currency profits. This change will make the UK an even more attractive base for international companies.

Legislation will be included in the next Finance Bill which will
provide for the existing rules for using foreign currency profits as the basis for computing taxable profits (called a “local currency election”) to be extended to activities other than trades
allow all companies to follow their accounting treatment for tax without having to make an election
allow capital allowances, trading losses and losses from property business to be computed in a currency other than sterling

The new rules will apply for accounting periods beginning on or after 1 January 2000. Companies which currently could make an election for local currency treatment but which have not done so will be allowed a further year using the current rules if they wish.

Draft legislation will be published for consultation before the Budget.


1. Under current law, a company which
carries on a trade and which draws up its accounts in a currency other than sterling, or
prepares its accounts from statements drawn up in a currency other than sterling in relation to a part of a trade
can elect, before the start of an accounting period, to use that local currency as its “functional currency” for tax purposes, subject to a number of conditions laid down in regulations. The main effect of an election is that the company will normally have no exchange gains and losses for tax purposes arising from fluctuations in exchange rates between sterling and its functional currency.

2. Following very helpful consultation with a number of interested bodies, the Government has decided to extend the use of non-sterling currency to companies which do not trade, and to the non-trading activities of trading companies. This will remove tax barriers to multinational groups setting up their international Treasury operations in the UK.

3. The Government has also decided that capital allowances can in future be calculated by reference to the non-sterling amount of expenditure on an asset, and that trading losses and losses on overseas property businesses can be carried forward in the non-sterling amounts and set against non-sterling figures of profit in later periods before translation into sterling.

4. In future use of a non-sterling currency for tax purposes will be automatic where the company meets certain conditions. There will be no need to make an election. The main condition is that the company either uses the currency concerned as the currency in which it draws up its whole accounts, or it uses the closing rate/net investment method to convert the results of a branch when drawing up its accounts in sterling. Using the particular local currency concerned must be in accordance with normal accounting practice. Use of a non-sterling local currency will not be permitted where the main benefit of employing it is to gain a tax advantage.

5. The new rules will apply for accounting periods beginning on or after 1 January 2000. Companies which have already made elections which cover this period for their trading activities will see no change, and will continue to make their returns for this period in the same way as for previous periods – except that they will now be able to compute capital allowances and losses in the functional currency.

6. Companies which have not yet made an election for a trade or part of a trade for a period, beginning after today or in respect of an overseas branch established after today, but which intend to do so, should still make the elections in the usual way pending the enactment of the new legislation. But even if they do not do so, the new rules will apply to them once they become law.

7. Companies which up to now have been in the position that they could have made an election for a trade or part of a trade, but did not do so, may choose to stay outside the new rules until their first accounting period to begin on or after 1 January 2001. An election to do this should be made once the new rules become law and before 31 August 2000.


The existing law on local currency is in sections 92 to 95, 149 and 163 Finance Act 1993 and regulations, the Local Currency Elections Regulations 1994 (SI 1994/3230). This law had effect for accounting periods beginning on or after 23 March 1995.

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