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Tax case – change in functional currency resulting in a foreign exchange loss

Tax case – change in functional currency

The Ball UK Holdings Ltd v The Commissioners for HM Revenue and Customs decision of the Upper Tribunal

Robert Norris - Director, International Tax, KPMG UK

Director, International Tax

KPMG in the UK


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The taxpayer has been unsuccessful in its appeal to the Upper Tribunal (UT) regarding whether a change in functional currency used in its statutory accounts was in accordance with UK generally accepted accounting practice (GAAP). The taxpayer had entered into a tax arrangement which involved becoming a party to a derivative contract towards the end of a period which triggered the application of FRS 23 (The Effects of Changes in Foreign Exchange Rates). Applying this standard resulted in a change in the functional currency used to prepare the statutory accounts from GBP to US dollars which generated a foreign exchange loss. The First-tier Tribunal (FTT) had said that the accounts were not in accordance with UK GAAP because the functional currency should have continued to be GBP. The taxpayer appeal to the UT has now been unsuccessful.

In one respect, the decision is only of historic interest because anti-avoidance provisions have been introduced to counteract this type of arrangement. However, the decision is of wider interest because the UT considered the role of the courts in the correct interpretation of accounting standards. Points of interest include:

  • The UT said that the interpretation of accounting standards is a factual matter to be determined based on the evidence of experts rather than a matter of legal interpretation. As a result, the role of the UT in the appeal was to determine whether the conclusions reached by the FTT could properly have been reached based on the evidence before it;
  • The UT acknowledged that the dividing line between interpretation and application of an accounting standard is not straightforward. In principle, FRS 23 must be interpreted in a uniform way such that there is not a free choice as to a company’s functional currency, though accountants may take a different view on its application to a particular set of facts;
  • The factual evidence which had been considered by the FTT included evidence from expert witnesses and consideration of FRS 23, parts of IAS 21, the Basis of Conclusions that accompanied IAS 21 and the historic development of the accounting standards. The tribunals based their decisions on an analysis of the wording of this material taking account of the evidence of experts;
  • FRS 23 sets out various factors which are relevant to determine a company’s functional currency, including whether the activities of Ball UK Holdings was an extension of the activity of its parent company, rather than being carried out with a significant degree of autonomy;
  • At the FTT it had been argued for the taxpayer that since Ball UK Holdings was an intermediate holding company and all material decisions were taken by its US parent company, the UK subsidiary was not autonomous from its US parent and so its functional currency was US dollars, the same as its parent. The UT said that the concept of autonomy in FRS 23 has a wider meaning than control over decision making and the focus should be the economic environment in which the entity operates and whether it is economically and functionally independent from its US parent; and
  • The UT considered whether the FTT had failed to have proper regard as to the interpretation of FRS 23 adopted by the accounting profession. It accepted that the PwC audit report, a Deloitte accounting opinion and accounting manuals published by ‘Big 4’ accounting firms could be relevant. However, the UT said that the FTT was entitled to conclude that the change in the functional currency to US dollars was not GAAP compliant preferring the evidence presented at the hearing by the accounting expert for HMRC. 

At the time of writing it is not known whether there will be a further appeal.

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