In 2002 the tax treatment of foreign exchange differences changed. From that date they fall within the loan relationship legislation and treated as either non trading or trading relationships.

Consider the case where a substantial asset was purchased from the EC in euros and financed by an hire purchase agreement in Euros.

In the accounts the purchase is treated as an asset and its value translated at the euro rate at date of invoice and the loan similarly dealt with.

The loan is restated at each year end based on the Euro exchange rate which in our case has resulted in an exchange loss over the last 12 months of £400,000.

Since this is a trading loan relationship the loss is treated as part of the trading profits and therefore is tax deductible. If an overall taxable loss had arisen this could be offset under the normal trading losses rules.

There would have been a slight difference if this had been a non trading relationship in terms of how the loss could be offset.