Accounting for an overseas branch

An overseas branch is part of the UK company, not a separate entity, so its assets, liabilities, income and expenses are included line by line in the company’s own accounts. How the branch’s records are translated depends on its functional currency under Section 30 of FRS 102. A branch that is an extension of the UK business is recorded as if the company had made the foreign currency transactions itself, while a largely autonomous branch is translated at closing and average rates with the exchange difference taken to other comprehensive income.

Why does the branch go into the company’s own accounts?

A branch has no separate legal personality. The contracts, assets and debts of the branch are those of the company, so the company’s individual accounts must include them; there is no investment in the branch to carry at cost as there would be with a subsidiary. The FRS 102 glossary defines a foreign operation as a subsidiary, associate, joint venture or branch whose activities are based or conducted in a country or currency other than those of the reporting entity, so a branch is expressly within the translation rules.

The tax position follows the same logic. Section 5 of the Corporation Tax Act 2009 makes a UK resident company chargeable to corporation tax on all its profits wherever arising, subject to the foreign branch exemption in Chapter 3A.

Does the branch have its own functional currency?

Paragraph 30.2 requires each entity to identify the currency of the primary economic environment in which it operates. Paragraph 30.3 looks at the currency that mainly influences sales prices and costs, and paragraph 30.5 adds specific factors for a foreign operation:

• whether its activities are an extension of the reporting entity or carried out with a significant degree of autonomy;
• whether transactions with the reporting entity are a high or low proportion of its activities;
• whether its cash flows directly affect the reporting entity’s cash flows and are readily available for remittance;
• whether its cash flows are sufficient to service its own debt without funds from the reporting entity.

Paragraph 30.5 gives the examples itself. A foreign operation that only sells goods imported from the reporting entity and sends the proceeds back is an extension. One that accumulates cash, incurs expenses, earns income and arranges borrowings substantially in its local currency is autonomous. A sales office in Dublin selling UK stock is likely to share sterling as its functional currency; a branch in Germany with its own customers, staff, suppliers and bank facilities in euros is likely to have the euro.

How is a branch with the same functional currency recorded?

If the branch shares the company’s functional currency, its transactions are simply the company’s foreign currency transactions. Paragraph 30.7 requires each one to be recorded at the spot rate on the transaction date, and paragraph 30.8 allows an average rate for a week or month unless rates fluctuate significantly. At the year end paragraph 30.9 requires monetary items such as the branch’s bank account, debtors and creditors to be retranslated at the closing rate, while non monetary items held at historical cost, such as the branch’s equipment, stay at the rate when they were acquired. Paragraph 30.10 puts the resulting exchange differences through profit or loss.

In practice the branch may still keep its own ledger in local currency. The UK finance team then has to translate it transaction by transaction, or at suitable average rates, and keep a separate record of fixed assets at historical sterling cost, not simply apply the closing rate to the whole trial balance.

How is a branch with its own functional currency translated?

An autonomous branch keeps its records in its own functional currency and is then translated into the company’s presentation currency. Paragraph 30.22 applies the procedures in paragraphs 30.17 to 30.21 when a foreign operation’s assets, liabilities, income and expenses are incorporated with those of the reporting entity:

• assets and liabilities at the closing rate (paragraph 30.18(a));
• income and expenses at the rates on the transaction dates, or an average rate if rates have not fluctuated significantly (paragraphs 30.18(b) and 30.19);
• all resulting exchange differences in other comprehensive income (paragraph 30.18(c)).

Paragraph 30.20 explains that the difference arises from translating income and expenses at transaction or average rates but net assets at the closing rate, and from translating opening net assets at a closing rate that differs from the previous one. The head office account in the branch’s books and the branch account in head office’s books cancel on combination, in the same way as intragroup balances.

How does it work with numbers?

Illustration only. A UK company has an autonomous branch in the eurozone with net assets of 100,000 euros at the start of the year and a profit of 20,000 euros for the year, with no remittances. Assume rates of 1.15 euros to the pound at the start, 1.16 on average and 1.18 at the year end.

Item	Euros	Rate	Sterling
Opening net assets	100,000	1.15	£86,957
Profit for the year	20,000	1.16	£17,241
Closing net assets	120,000	1.18	£101,695
Exchange difference (balancing figure)			(£2,503)

The company’s profit and loss account includes the branch’s income and expenses at the average rate, contributing £17,241 of profit. The £2,503 loss from the weaker euro goes to other comprehensive income. If the branch shared sterling as its functional currency, part of that difference would instead be a profit or loss item, arising on the branch’s monetary balances.

What about tax and the tax note?

Unless the company has made an election under section 18A of the Corporation Tax Act 2009, the branch’s profits are taxed in the UK as part of the company’s profits. Section 5 of the Corporation Tax Act 2010 requires those profits to be calculated and expressed in sterling, with sections 6 to 9 dealing with companies that have a non sterling functional or presentation currency. Foreign tax paid on the branch profits can usually be credited against the UK tax on the same income under section 18 of the Taxation (International and Other Provisions) Act 2010.

In the accounts, foreign tax on the branch’s profits is part of the company’s tax charge. For companies reporting under SI 2008/410, Schedule 1 paragraph 67(2) requires the UK corporation tax charge, what it would have been without double taxation relief, and the charge for tax imposed outside the UK to be stated.

What must be disclosed?

Paragraph 30.25 requires disclosure of exchange differences recognised in profit or loss, other than on financial instruments at fair value through profit or loss, and exchange differences recognised in other comprehensive income. Paragraph 30.26 requires the presentation currency to be stated, and paragraph 30.27 requires disclosure of a change in the functional currency of a significant foreign operation, with the reason.

Older directors’ reports often included a line noting the company’s branches outside the UK. That requirement was in paragraph 7 of Schedule 7 to SI 2008/410, which SI 2024/1303 omitted for financial years beginning on or after 6 April 2025.

What mistakes come up most often?

• Translating an integrated branch’s whole trial balance at the closing rate, which misstates fixed assets and puts differences in the wrong place.
• Taking an autonomous branch’s translation difference through profit or loss instead of other comprehensive income.
• Leaving the head office and branch current accounts out of balance after translation, and burying the difference in sundry expenses.
• Forgetting that the branch’s profits are taxable in the UK unless the section 18A election is in place.
• Omitting the paragraph 30.25 exchange difference disclosures.

Related guides: functional currency, foreign currency transactions, translating a foreign subsidiary, the foreign branch exemption, branch or subsidiary, foreign tax credit relief and functional currency for corporation tax.

Solar Protect provides tax investigation insurance for businesses and fee protection schemes for accountancy practices. Read how our cover works or get a quote.

Related Accountapedia entries

• Setting up in the UK: branch or subsidiary
• The foreign branch exemption election
• MTD for Income Tax with overseas property income
• Tax on director fees from an overseas company
• Acting for overseas clients

Sources

• Financial Reporting Council: FRS 102 September 2024 tmKYWO6
• legislation.gov.uk: Act 2009 c. 4, section 5
• legislation.gov.uk: Act 2009 c. 4, section 18A
• legislation.gov.uk: Act 2010 c. 4, section 5
• legislation.gov.uk: Act 2010 c. 8, section 18
• legislation.gov.uk: SI 2008/410, schedule 1
• legislation.gov.uk: SI 2008/410, schedule 7
• legislation.gov.uk: SI 2008/410, schedule 7

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.