Exchange losses arising on change in functional currency allowed by UT

Wed 05 Dec 2018

The Upper Tier Tax Tribunal (UTT) has dismissed HMRC’s appeal against the First Tier Tribunal’s (FTT) decision to allow exchange losses appearing in the accounts and arising on a change in functional currency of various companies in the Smith & Nephew group as tax deductible debits. The UTT decision may be found here.

The major issue considered in the FTT decision was whether the debits recognised in the accounts  “fairly represented” the exchange loss arising. This test was removed from the loan relationship rules for accounting periods commencing on or after 1 January 2016 (subject to transitional rules), so is largely of historic interest. However, the UTT also considered that guidance in accounting manuals produced by the big four firms is useful in establishing evidence of practice.  Such manuals may be used, for example, to determine whether the accounts should be followed in cases where the tax rules are drafted to follow the accounts.

The case summary mentions another case concerning a change in functional currency and the relevance of accounting manuals in assessing the interpretation for tax. Ball (UK) Holdings was heard in the UT in November 2018 and the decision will be published in due course. It will be interesting to see what the Court has to say on accounting issues.  A summary of the FTT decision in Ball (UK) Holdings case can be found here.

For a further discussion of the interaction of tax and accounting rules on corporation tax, please get in touch with a member of the Mazars corporate tax team.