Introduction Details of the Schedule
2.Paragraph 2 amends section 92(2) of the Finance Act (FA) 1993 to reflect amendments to section 92D of FA 1993 and the insertion of sections 92DA, 92DB, 92DC and 92DD of FA 1993.
3.Paragraph 3 inserts new subsection (4) to section 92B of FA 1993 and paragraph 4 inserts new subsection (5) to section 92C of FA 1993. These subsections ensure that where any amounts are required to be translated into another currency they are translated at the “appropriate exchange rate”. The “appropriate exchange rate” is defined at new section 92E(4) of FA 1993 (see paragraph 45).
4.Paragraph 5 substitutes, in place of the existing section 92D of FA 1993, a new section 92D of FA 1993 and also introduces new sections 92DA, 92DB, 92DC, 92DD and 92DE to FA 1993 that deal with the translation of “carried back amounts” and “carried forward amounts”.
5.New section 92D provides the “basic rule” for translating amounts into sterling – the section will apply, subject to the special rules at sections 92DA and 92DB of FA 1993, where any profit or loss is required by section 92B or 92C of FA 1993 to be translated into its sterling equivalent and any such translations should be made by reference to the “appropriate exchange rate”.
6.New section 92DA sets out the rules to determine the sterling equivalent of “carried back amounts”. Such amounts are defined in new section 92DE(1) of FA 1993.
7.New subsection (1) sets out when section 92DA applies. This is where a company carries back any amount and with regard to that amount the loss is required to be translated into sterling by section 92B or 92C of FA 1993.
8.New subsection (2) sets out that a translation required by this section must be made in accordance with one of three rules, whichever is applicable, set out in the following subsections.
9.New subsection (3) sets out when Rule 1 is applicable and will be the most common situation. This is where the operating currency of the company in the accounting period in which the carried back loss originated and the operating currency of the company in the earlier accounting period in which that loss is utilised are the same.
10.New subsection (4) states that Rule 1 is that the exchange rate for translating any carried back amounts utilised in an earlier accounting period must be the same as the exchange rate used in computing the profits of that earlier accounting period.
11.New subsection (5) sets out when Rule 2 is applicable. This deals with changes in operating currency and applies where losses originating in an accounting period when sterling is not the operating currency are carried back into a period when sterling is the operating currency.
12.New subsection (6) states that Rule 2 is that the rate of exchange for translating the carried back loss must be the spot rate on the last day of the relevant accounting period. The “relevant accounting period” is defined in subsection (9) (see paragraph 15). This will convert non-sterling losses carried back into sterling at the end of the last accounting period where sterling was the operating currency even though the loss may not, necessarily, be utilised in that period. Consequently, the value of those losses, in sterling, will remain the same throughout all periods where sterling is the operating currency.
13.New subsection (7) sets out when Rule 3 is applicable. This deals with changes in operating currency and applies where losses originate in an accounting period in one currency and are carried back into an accounting period where profits and losses are computed in a different non-sterling operating currency.
14.New subsection (8) states that Rule 3 requires two stages. Firstly, any loss carried back into an earlier accounting period is translated into the operating currency of the earlier accounting period at the spot rate on the last day of the “relevant accounting period”. The “relevant accounting period” is defined at subsection (9) (see paragraph 15). This will convert the carried back losses into the previous operating currency at the end of the last accounting period where there was a different operating currency even though the loss may not necessarily be utilised in that period. Consequently, the value of those losses, in the previous operating currency, will remain the same throughout all periods where that previous operating currency is the operating currency. Secondly, the carried back amount that has been translated into the operating currency of the earlier accounting period is then translated into sterling at the same rate of exchange as the profits of the earlier accounting period in which the loss is utilised.
15.New subsection (9) defines the “relevant accounting period” for the purposes of subsections (6) and (8). This ensures that the value of losses, in the previous operating currency, will remain the same throughout all periods where that previous operating currency is the operating currency.
16.New section 92DB deals with the situation where amounts calculated in a non-sterling currency are carried forward and utilised against profits in a later accounting period.
17.New subsection (1) sets out when section 92DB applies. This is where a company carries forward any amount and with regard to that amount a loss is required to be translated into sterling by section 92B or 92C of FA 1993.
18.New subsection (2) sets out that a translation required by this section must be made in accordance with one of three rules set out in the following subsections, depending on whichever is applicable.
19.New subsection (3) sets out when Rule 1 is applicable and will be the most common situation. This is where the operating currency of the company in the accounting period in which the carried forward loss originated and the operating currency of the company in the later accounting period in which that loss is utilised are the same.
20.New subsection (4) states that Rule 1 is that the exchange rate for translating any carried forward amounts utilised in a later accounting period must be the same as the exchange rate used in computing the profits and losses of that later accounting period.
21.New subsection (5) sets out when Rule 2 is applicable. This deals with changes in operating currency and applies where losses originating in an accounting period when sterling is not the operating currency are carried forward into a period when sterling is the operating currency.
22.New subsection (6) states that Rule 2 is that the rate of exchange for translating the carried forward loss must be the spot rate on the first day of the “relevant accounting period”. The “relevant accounting period is defined at subsection (9) (see paragraph 25).This will convert non-sterling losses carried forward into sterling at the beginning of the first accounting period where sterling is the operating currency even though the loss may not necessarily be utilised in that period. Consequently, the value of those losses, in sterling, will remain the same throughout all periods where sterling is the operating currency.
23.New subsection (7) sets out when Rule 3 is applicable. This deals with changes in operating currency and applies where losses originate in an accounting period in one currency and are carried forward into an accounting period where profits and losses are computed in a different non-sterling operating currency.
24.New subsection (8) states that Rule 3 requires two stages. Firstly, any loss carried forward into a later accounting period is translated into the operating currency of the later accounting period at the spot rate on the first day of the “relevant accounting period.” This will convert the carried forward losses into the future operating currency at the start of the first accounting period where there is a different operating currency even though the loss may not necessarily be utilised in that period. Consequently, the value of those losses, in the future operating currency, will remain the same throughout all periods where that future operating currency is the operating currency. Secondly, the carried forward amount that has been translated into the operating currency of the later accounting period is then translated into sterling at the same rate of exchange as the profits of the later accounting period in which the loss is utilised.
25.New subsection (9) defines the “relevant accounting period” for the purposes of subsections (6) and (8). This ensures that the value of losses, in the future operating currency, will remain the same throughout all periods where that future operating currency is the operating currency.
26.New section 92DC of FA 1993 deals with the situation where losses calculated in sterling are carried back and utilised against profits in an earlier accounting period when sterling is not the operating currency.
27.New subsection (1) sets out that section 92DC of FA 1993 applies where three Conditions (A to C) are met.
28.New subsection (2) is Condition A. This is that a company’s accounts have either been prepared in sterling or identify sterling as the functional currency.
29.New subsection (3) is Condition B. This is that there is a loss that is to be carried back for offset against profits in a previous accounting period.
30.New subsection (4) is Condition C. This is that the operating currency in the period in which the loss is being offset is not sterling.
31.New subsection (5) sets out the consequences of meeting the three Conditions for section 92DC of FA 1993. Firstly, any loss carried back into an earlier accounting period is translated into the operating currency of the earlier accounting period at the spot rate on the last day of the “relevant accounting period”. The “relevant accounting period” is defined at subsection (6) (see paragraph 32). This will convert the carried back losses into the previous operating currency at the end of the last accounting period where there was a different operating currency even though the loss may not necessarily be utilised in that period. Consequently, the value of those losses will remain the same throughout all periods where that previous operating currency is the operating currency. Secondly, the carried back amount is retranslated back into sterling at the same rate of exchange as the profits of the earlier accounting period in which the loss is utilised.
32.New subsection (6) defines the “relevant accounting period” for the purposes of subsection (5)(a). This ensures that the value of losses, in the previous operating currency, will remain the same throughout all periods where the previous operating currency is the operating currency.
33.New section 92DD deals with the situation where losses calculated in sterling are carried forward and utilised against profits in a later accounting period when sterling is not the operating currency.
34.New subsection (1) sets out that section 92DD of FA 1993 applies where three Conditions (A to C) are met.
35.New subsection (2) is Condition A. This is that a company’s accounts have either been prepared in sterling or identify sterling as the functional currency.
36.New subsection (3) is Condition B. This is that there is a loss that is to be carried forward for offset against profits in a future accounting period.
37.New subsection (4) is Condition C. This is that the operating currency in the period in which the loss is being offset is not sterling.
38.New subsection (5) sets out the consequences of meeting the three Conditions for section 92DC of FA 1993. Firstly, any loss carried forward into a later accounting period is translated into the operating currency of the later accounting period at the spot rate on the first day of the “relevant accounting period”. The “relevant accounting period” is defined at subsection (6) (see paragraph 39). This will convert the carried forward losses into the later operating currency at the start of the first accounting period where there is a different operating currency even though the loss may not necessarily be utilised in that period. Consequently, the value of those losses will remain the same throughout all periods where that later operating currency is the operating currency. Secondly, the carried forward amount is retranslated back into sterling at the same rate of exchange as the profits of the later accounting period in which the loss is utilised.
39.New subsection (6) defines the “relevant accounting period” for the purposes of subsection (5)(a). This ensures that the value of losses, in the later operating currency, will remain the same throughout all periods where the later operating currency is the operating currency.
40.Sections 92DE (1) and (2) of FA 1993 set out the meaning of “carried–back amount” and “carried-forward amount.”
41.New subsection (3) clarifies that the references in sections 92DB and 92DD of FA 1993 to the profit against which carried-forward losses are to be offset would be the amount of profit ignoring the deduction of carried forward losses against that profit.
42.New subsection (4) clarifies that subsection (3) applies equally to amounts that are offset as though they are a loss of the later period. This would apply to, for example, expenses of management carried forward and offset in a later period as though they are a loss in the period in which they are utilised under section 1223 of the Corporation Tax Act 2009.
43.Paragraphs 6(1)-(6) make consequential amendments to section 92E of FA 1993.
44.Paragraph 6(7) inserts new subsections (4) and (5) into section 92E.
45.New subsection (4) contains a new definition of “the appropriate exchange rate” for the purposes of section 92B to 92D of FA 1993. This replaces the definition previously at section 92D(2) of FA 1993 and like the previous definition allows for either the average for the accounting period or the spot rate on the day of the transaction(s). The new definition removes any uncertainty that spot rates may be used, on a just and reasonable basis, where there is more than one transaction in the accounting period. It also states that where there is only one transaction, an appropriate spot rate must be used and so in that circumstance there is no choice between using an average rate or a spot rate.
46.New subsection (5) inserts a definition of “operating currency” for the purposes of section 92DA and 92DB of FA 1993.
47.Paragraph 7 provides for the commencement date for the amendments made by this Schedule. The changes apply to accounting periods beginning on or after the commencement (as defined in paragraph 12(3)).
48.Paragraph 8 provides transitional rules where non-sterling losses are carried back and utilised in accounting periods prior to the commencement of this Schedule.
49.Paragraph 8(1) sets out that paragraph 8 applies where there are non-sterling losses arising in an accounting period to which this Schedule applies that are utilised in an accounting period prior to the commencement of this Schedule.
50.Paragraph 8(2) states where the condition in paragraph 8(2) is met then the normal rules relating to non-sterling losses that are carried back and utilised in earlier accounting periods at section 92DA of FA 1993 will not operate.
51.Paragraph 8(3) sets out, where the condition in paragraph 8(2) is met, carried-back losses originating in non-sterling currencies must be translated into sterling at the “appropriate exchange rate” for the accounting period in which the loss arises. The “appropriate exchange rate” is defined at section 92E(4) of FA 1993 (see paragraph 45).
52.Paragraph 9 provides transitional rules where non-sterling losses originate in an accounting period prior to the commencement of this Schedule but are utilised in an accounting period to which this Schedule applies.
53.Paragraph 9(1) sets out when paragraph 9 applies. This being that there are non-sterling losses arising in an accounting period prior to the commencement of this Schedule that are utilised in an accounting period to which this Schedule applies.
54.Paragraph 9(2) sets out, where the condition in Paragraph 9(2) is met, the three steps that must be followed in order to translate carried-forward losses originating in non-sterling currencies into sterling. Step 1 is to translate the loss into sterling at the “appropriate exchange rate” for the accounting period in which the loss arises. Step 2 is to translate the loss from Step 1 (now in sterling) into the original currency at the spot rate of exchange on the first day of the first accounting period to which this Schedule applies. Step 3 is to translate the loss resulting from Step 2 into sterling as per Rules 1, 2 or 3 set out in paragraph 9(4).
55.Paragraph 9(3) sets out when Rule 1 is applicable. This is where the operating currency of the company in the accounting period in which the carried forward loss originated and the operating currency of the company in the later accounting period in which that loss is utilised are the same.
56.Rule 1 in Paragraph 9(4) is that the exchange rate used in translating any carried forward amounts utilised in a later accounting period must be the same as the exchange rate used in computing the profits of that later accounting period.
57.Paragraph 9(5) sets out when Rule 2 is applicable. This deals with changes in operating currency and applies where losses originating in an accounting period when sterling is not the operating currency are carried forward into a period when sterling is the operating currency.
58.Rule 2 in Paragraph 9(6) is that the rate of exchange for translating the carried forward loss must be the spot rate on the first day of the “relevant accounting period”. The “relevant accounting period is defined at subsection (9) (see paragraph 61). This will convert non–sterling losses carried forward into sterling at the beginning of the first accounting period where sterling is the operating currency even though the loss may not necessarily be utilised in that period. Consequently, the value of those losses, in sterling, will remain the same throughout all periods where sterling is the operating currency.
59.Paragraph 9(7) sets out when Rule 3 is applicable. This deals with changes in operating currency and applies where losses originate in an accounting period in one currency and are carried forward into an accounting period where profits and losses are computed in a different non-sterling operating currency.
60.Rule 3 in Paragraph 9(8) requires two stages. Firstly, any loss carried forward into a later accounting period is translated into the operating currency of the later accounting period at the spot rate on the first day of the ”relevant accounting period.” The “relevant accounting period” is defined at subsection (9) (see paragraph 61). This will convert the carried forward losses into the future operating currency at the start of the first accounting period where there is a different operating currency even though the loss may not necessarily be utilised in that period. Consequently, the value of those losses, in the future operating currency, will remain the same throughout all periods where that future operating currency is the operating currency. Secondly, the carried forward amount that has been translated into the operating currency of the later accounting period is then translated into sterling at the same rate of exchange as the profits of the later accounting period in which the loss is utilised.
61.Paragraph 9(9) defines the “relevant accounting period” for the purposes of subsections (6) and (8). This ensures that the value of losses, in the future operating currency, will remain the same throughout all periods where that future operating currency is the operating currency.
62.Paragraph 10 provides transitional rules where sterling losses are carried back into a period prior to the commencement of this Schedule.
63.Paragraph 10(1) sets out the specific conditions for paragraph 10 to apply. These are where sterling losses are carried back and utilised against profits in an accounting period prior to the commencement of this Schedule where sterling is not the operating currency.
64.Paragraph 10(2) sets out that where the conditions in paragraph 10(1) are met then the rules relating to the translation of carried back losses at section 92DC will not apply. The sterling losses carried back will be offset against the profits of the company in the earlier accounting period translated into sterling.
65.Paragraph 11 provides transitional rules where sterling losses are carried forward from an accounting period prior to the commencement of this Schedule into an accounting period after the commencement of this Schedule.
66.Paragraph 11(1) sets out the specific conditions for paragraph 11 to apply. These are where sterling losses originating in an accounting period prior to the commencement of this Schedule are carried forward and utilised against profits in an accounting period after the commencement of this Schedule where sterling is not the operating currency.
67.Paragraph 11(2) sets out that, with one modification (see paragraph 68), the normal rules relating to the translation of losses originating in sterling that are offset against profits computed in a non-sterling currency in a later accounting period will apply (section 92DD of FA 1993).
68.Paragraph 11(3) alters the meaning of “relevant accounting period” in subsection (6) of section 92DD of FA 1993 when that section is applied to losses that meet the conditions at paragraph 11(1). Where this is the case, “relevant accounting period” will mean the first accounting period beginning on or after the commencement of this schedule in which the operating currency is not sterling. This would mean that translation would take place on the first day of that “relevant accounting period”.
69.Paragraph 12(2) makes clear that the provisions in subsections (3) and (4) of section 92DE of FA 1993 (that deal with references to the profit against which a carried-forward amount is to be set off) apply in relation to this whole Schedule in the same manner as they apply in relation to sections 92DB and 92DD of FA 1993.
70.Paragraph 12(3) states that “the commencement date” for the purposes of this Schedule means 29 December 2007.
71.Paragraph 13(1) provides that a company can elect to ensure that paragraphs 9 and 11 (the transitional rules that relate to amounts carried forward from earlier periods) does not apply and defers “the commencement date” from 29 December 2007 to the day on which this Act is passed. The election will therefore enable a company to ensure that all brought forward losses at the beginning of the first accounting period beginning on or after Royal Assent are not translated from sterling back into the currency in which the loss originated. This will prevent any companies from being disadvantaged by this Schedule.
72.Paragraph 13(2) sets out the time limit within which any election under Paragraph 10 should be made and ensures that any such election is irrevocable. The normal rules relating to elections at Schedule 1A to the Taxes Management Act 1970 (TMA) will apply.