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Fair losses

07 March 2017
Issue: 4590 / Categories: Tax cases

Smith and Nephew Overseas Ltd; T P Ltd; Smith and Nephew Finance Holdings Ltd (TC5644)

Foreign exchange losses after change in local currency

As a result of a company reorganisation changing their functional currency from sterling to US dollars the taxpayers claimed foreign exchange losses in their tax returns. They said the losses had arisen because of the fall in value of the pound against the dollar. HMRC refused the claim. The taxpayers appealed.

The First-tier Tribunal decided first that by adopting the foreign operation method the taxpayers’ accounts complied with generally accepted accounting practice in the UK. It further agreed that the exchange differences in the accounts were exchange losses within FA 1996 s 103. They had arisen because of valuations made by reference to exchange rates at different times which were beyond the control of the companies.

The tribunal next had to consider whether the exchange differences fairly represented the losses. HMRC said the inclusion of ‘fairly represent’...

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