What is the basic rule for converting non-sterling profits into sterling under CTA 2010 section 11?

Under section 11 of the Corporation Tax Act 2010, the default method is to use the average exchange rate for the accounting period. This translates the company's foreign currency profit or loss into sterling so that the correct United Kingdom corporation tax liability can be calculated.

Can a company use a spot rate instead of the average exchange rate under section 11?

Yes. If the amount relates to a single transaction, the company may use the appropriate spot rate prevailing at the time of that transaction. If multiple transactions are involved, the company may use a rate derived on a just and reasonable basis from the relevant spot rates for each transaction.

Does the basic rule in section 11 apply to losses carried forward or carried back?

No. Where the currency translation relates to losses being carried forward to a future accounting period or carried back to an earlier one, separate rules override the basic rule in section 11. These ensure the sterling equivalent is determined appropriately for cross-period loss relief.

How does the choice of translation method affect a company's taxable profit?

The method chosen can produce different sterling equivalents. For example, using an average rate of 1.25 USD/GBP on a $1,200,000 profit gives £960,000, whereas a spot rate of 1.20 gives £1,000,000. Whichever method is used must comply with the rules in section 11.

Corporation Tax Act 2010 section 11

Sterling equivalents: basic rule

Section 11 sets out how a company must convert its profits or losses from a non-sterling currency into sterling when required to do so for corporation tax purposes.

When a company calculates its profits or losses in a foreign currency, it must translate those figures into sterling using an approved method.
The default method is to use the average exchange rate for the accounting period in question.
As an alternative, the company may use an appropriate spot rate for a single transaction, or a rate derived on a just and reasonable basis from spot rates where multiple transactions are involved.
Special rules apply where the translation relates to losses carried forward or carried back, which override the basic rule.

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