Special valuation provisions: valuation of supplies expressed in foreign currencies - Paragraph 11, Schedule 6, VATA 1994
The basis for valuing supplies expressed in foreign currencies can be found in Article 91(2) of Dir. 2006/112.
91(2) Where the factors used to determine the taxable amount of a transaction other than the importation of goods are expressed in a currency other than that of the Member State in which assessment takes place, the exchange rate applicable shall be the latest selling rate recorded, at the time VAT becomes chargeable, on the most representative exchange market or markets of the Member State concerned, or a rate determined by reference to that or those markets, in accordance with the rules laid down by that Member State.
Member States shall accept instead the use of the latest exchange rate published by the European Central Bank at the time the tax becomes chargeable. Conversion between currencies other than the euro shall be made by using the euro exchange rate of each currency. Member States may require that they be notified of the exercise of this option by the taxable person.
However, for some of the transactions referred to in the first subparagraph or for certain categories of taxable persons, Member States may use the exchange rate determined in accordance with the Community provisions in force governing the calculation of the value for customs purposes.
The provisions of the Article have been implemented by the UK in paragraph 11 of Schedule 6 to the VATA 1994. The first sub-section of paragraph 11 states:
(1) Subject to the following provisions of this paragraph, where -
(a) there is a supply of goods or services; and
(b) any sum relevant for determining the value of the supply is expressed in a currency other than sterling,
then, for the purpose of valuing the supply, that sum is to be converted into sterling at the market rate which, on the relevant day, would apply in the United Kingdom to a purchase with sterling by the person to whom they are supplied of that sum in the currency in question.
Sub-sections (2) to (6) of the paragraph provide that Customs can issue a notice specifying the rates of exchange and methods of determining rates of exchange that can be used. Accordingly, such notices have been issued. The permissible exchange rates are set out as tertiary legislation in Notice 700 (HMRC website): The VAT guide for supplies and Notice 725 VAT (HMRC website): The Single Market, they are:
- Customs’ period rate of exchange as published by HMRC.
- The UK market-selling rate at the time of supply/acquisition. This can be obtained from national newspapers.
- The European Central Bank rate published at the time the tax is chargeable (with effect from 1 Jan 2013). If this option is exercised HMRC must be notified.
- A rate agreed between the trader and HMRC which must be:
a) Determined by reference to the UK market
This does not necessarily mean that it must be solely based upon the UK market, but the UK market must be the predominant factor which determines the rate of exchange. Rates based solely upon other exchange markets, for example the US market, are not acceptable.
b) Objectively verifiable
This means that the exchange rate must be based upon actual rates of exchange and not be purely speculative or hypothetical. For example, if a trader wished to apply a rate for monthly intervals which was based upon the average UK market rate for the preceding quarter, this would be acceptable.
c) The rate used should be updated periodically
You should not normally accept a method where the rate is updated less frequently than monthly. This is because the value we are seeking to establish is what the supply would cost to purchase in sterling at the time of supply. The greater the period between the time of supply and introduction of the exchange rate being used, the less likely it is that the value will be accurately reflected.
Common questions about the acceptability of exchange rate methods
Where a trader contracts to purchase foreign currency at a specified rate in advance of any supplies/acquisitions. The contention will be that this safeguards future transactions from exchange rate fluctuations. However, the question of the comparative values of currencies is not the same as that of the value of the supply/acquisition at the relevant time with which we are concerned.
Normally these contracted purchase rates of exchange will not be acceptable because they will be forward rates or determined by methods that rely upon forward rates. Forward rates are not based upon actual exchange rates but are speculative or hypothetical, being founded upon what the exchange rate is estimated to be at some future point in time.
The contracted purchase rate of exchange would only be acceptable where
- The contracted rate is one of the three acceptable rates previously described (e.g. the UK selling rate on the day of the contract) and
- The actual time of supply or acquisition is no later than one month after the date of the contract.
Where a trader seeks to value a supply/acquisition by reference to the exchange rate in use at the time the supplies were ordered or contracted for, normally this will not be acceptable because this does not create a tax point. Again, provided the exchange rate itself is acceptable, this could be used where the tax point occurs no later than a month afterwards.
Occasionally policy is asked whether it is acceptable for two traders, both based within the UK, to conduct transactions involving supplies wholly within the UK in a foreign currency. This is perfectly permissible provided the correct valuation rules relating to exchange rates are observed and the invoicing requirements are complied with.
Foreign currency and the Tour Operators’ Margin Scheme
There are special rules that override use of the valuation of supplies expressed in foreign currencies in Paragraph 11, Schedule 6, VATA 1994, when the Tour Operators’ Margin Scheme applies. These are to be found inNotice 709/5 (HMRC website) Section 13 Tertiary Law TL2 section 3]