Foreign currency transactions, VAT and Tour Operators
Converting foreign currencies into sterling for VAT accounting purposes and how to use the Tour Operators' Margin Scheme.
You can buy goods and services in the currency of your choice. But all purchases or sales must be converted into sterling for VAT purposes.
You must carry out this conversion when you record the transaction in your VAT accounts, so they show the transaction in sterling.
Invoicing in foreign currencies
You can invoice in any currency for the goods and services that you supply. If UK VAT is due on the transaction your invoices must also show the following in sterling:
- the total net value of goods and services at each VAT rate
- the amount of VAT, if any, at each rate
You do not need to show sterling figures for each line on the invoice.
If you issue invoices before you actually supply the goods or services, the date of supply will be in the future. These are ‘advance invoices’ and must be in sterling for VAT purposes. The sterling amounts will be what you’ll have to enter into your VAT records. You can also show your invoice amounts in a foreign currency, but you’ll have to make it clear that for VAT purposes, the value of the supply is the sterling figure, and is not a conversion of the foreign currency amount.
How you convert foreign currency transactions into sterling
There are 2 standard ways to convert your foreign currency transactions into sterling for VAT purposes. You can use the:
- UK market selling rate at the time of the supply. The rates published in national newspapers are acceptable.
- Exchange rates published by HM Revenue and Customs (HMRC). This is 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, but you should check to see if there have been any adjustments within the period.
You can use the period rate for all your supplies, or just for a specific type of supply. If you decide to use the period rate just for a specific type of supplies, you must make a note of the details in your records. You don’t need to tell HMRC. However, if you change your mind at a later date you must get agreement from HMRC.
The rate you use for commercial purposes
If you don’t want to use either of the standard rates you can use a different method for your calculations. But you must get approval from HMRC if you want to use it for VAT accounting.
HMRC will consider:
- 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 can’t use forward rates, or methods deriving from forward rates.
The Tour Operators’ Margin Scheme
If you are using the Tour Operators’ Margin Scheme (TOMS) converting foreign currencies into sterling for VAT purposes is slightly different.
If any of the supplies that you buy in order to resell as TOMS supplies are billed to you in a foreign currency, you must convert the cost into sterling to calculate your margin.