Accounting for VAT on Foreign Currency Sales
The rules regarding sales in foreign currencies which are subject to UK VAT can be difficult to navigate. Here we look at the guidance HMRC offers on this topic, so that you can avoid some of the common pitfalls which can trip up businesses which invoice in foreign currencies.
The key rule, which businesses may not realise, is that while the invoice is in a foreign currency, both the total net value of the invoice and the VAT amount must also be shown in sterling. When working out the sterling amounts, the exchange rate used must be either the exchange rate at the time of supply, which can be found in national newspapers, or the period rates published by HMRC here. The period rates can be used for all your supplies or just a specific type of supply. You do not need to tell HMRC which you decide to use, but you must seek permission from them if you later wish to change your mind. It is possible to use a different method than the two listed here, but you will need to get approval from HMRC first.
It is important to note that the sterling amount on the invoice is the amount which must be paid over to HMRC, even if movement in the exchange rate means that a different amount of sterling is received in payment. This is the case even if you use the cash accounting scheme for VAT.
If you do use the cash accounting scheme, and you receive a partial payment for the invoice in the foreign currency, you must work out the proportion of the invoice which has been paid, and include this proportion of the VAT amount in your VAT return. If you receive the partial payment in sterling, you must first convert it to the foreign currency using the same method used when working out the sterling amounts on the invoice, and then work out the proportion of the invoice paid.
Finally, if you are invoicing for the goods or services before the time of supply, you must invoice in sterling. You may also put the amounts in a foreign currency, but you must make it clear that the sterling figure is the value of the supply and not simply a conversion of the foreign currency amounts.
If you need more information on accounting for VAT on foreign currency transactions, please speak to your Barnes Roffe contact.
Blog written by Tom PeachTalk to Barnes Roffe today