VAT and Foreign Currency Transactions

Introduction

If your business deals with foreign currency transactions, you still need to convert all amounts into sterling (pounds) for VAT purposes. This applies whether you're buying from overseas suppliers or invoicing foreign customers. Understanding which exchange rates to use and when to apply them will help you keep accurate VAT records and stay compliant with HMRC requirements.

When you need to convert foreign currency for VAT

You can buy and sell goods and services in any currency you choose. However, all transactions must be converted into sterling when you record them in your VAT accounts. This conversion must happen when you record the transaction, ensuring your VAT records always show amounts in pounds.

This requirement applies whether the foreign currency appears on invoices you receive from suppliers or on invoices you issue to customers.

How to show VAT on foreign currency invoices

If you invoice customers in a foreign currency and UK VAT applies to the transaction, your invoice must show certain information in sterling:

• The total net value of goods and services at each VAT rate
• The amount of VAT at each rate

You don't need to convert every individual line item on the invoice into sterling – only these VAT summary figures.

Special rules for advance invoices

If you issue invoices before you supply the goods or services (known as "advance invoices"), different rules apply. These invoices must show amounts in sterling for VAT purposes, and the sterling amounts are what you enter into your VAT records.

You can also show foreign currency amounts on advance invoices, but you must make it clear that the sterling figure represents the value of the supply for VAT purposes. The foreign currency amount cannot be treated as the primary figure that needs converting.

Which exchange rate to use

HMRC accepts two standard methods for converting foreign currency transactions into sterling for VAT:

Method 1: UK market selling rate

You can use the UK market selling rate at the time of supply. Exchange rates published in national newspapers are acceptable for this purpose.

Method 2: HMRC period rate of exchange

You can use the official exchange rates published by HMRC, known as the "period rate of exchange". The advantage of this method is that you can use the same rate for an entire period – usually a calendar month. However, you should check whether HMRC has made any adjustments to rates within the period.

You have flexibility in how you apply the period rate. You can use it for all your supplies, or just for specific types of supplies. If you choose to use the period rate only for certain types of supplies, you must keep a note of this in your records. You don't need to inform HMRC of this decision initially, but if you want to change your approach later, you must get HMRC's agreement before doing so.

Using a different exchange rate method

If neither of the standard methods suits your business, you can request permission from HMRC to use a different calculation method. HMRC will consider your request based on:

• Whether your proposed rate or method is based on the UK currency market
• Whether the rate can be verified impartially
• How often you will update the rate

You cannot use forward rates (exchange rates agreed now for transactions that will happen in the future), or any methods that derive from forward rates.

To get approval for an alternative method, you need to contact HMRC before you start using it for VAT accounting purposes.

Tour Operators' Margin Scheme

If your business uses the Tour Operators' Margin Scheme (TOMS), slightly different rules apply to foreign currency conversion.

When you buy supplies in a foreign currency that you then resell as TOMS supplies, you must convert the cost into sterling to calculate your margin for VAT purposes. This ensures you correctly calculate the VAT due under the margin scheme.

Record keeping

Whichever exchange rate method you use, you must keep clear records showing:

• The foreign currency amount
• The sterling amount after conversion
• Which exchange rate you used
• The date of the transaction or supply

These records are essential if HMRC queries your VAT returns or conducts an inspection of your VAT accounting.

Consistency is key

Once you've chosen an exchange rate method, you should apply it consistently across your VAT accounting periods. If you use the period rate for certain types of supplies, document this clearly. Any changes to your approach require careful record keeping, and in some cases, HMRC approval.

Sources

• Transactions in foreign currencies and VAT
• Exchange rates for customs and VAT

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.