Tax implications for payments received in non-GBP currencies in limited company

[adamaid]

Hi All,

Apologies if this is a noob question - I did try searching the forums for a clear answer and wasn't able to find one.

I have recently started freelancing through a UK limited company (not VAT registered). I work with clients all over the world, and whilst I bill in GBP, I generally accept payment in EUR or USD (converted from GBP using the relevant spot rates on the day of the invoice), into EUR or USD denominated accounts.

This means that these payments remain in EUR & USD and therefore I may make gains (or losses) due to movements in GBP / EUR and GBP / USD fx rates.

Does anyone know how these gains / losses would be taxable?

e.g. suppose I bill a client on 1st Jan £100, and they pay me $120 USD using the 1st Jan fx rate. By the end of the tax year, this $120 may now be worth £110 due to changes in the GBP / USD fx rate. How is this additional £10 taxed?

Very much appreciate any thoughts / advice etc. etc. in the area!

Thanks,
Adam

[jamesbrown]

Like any other company profit However, from your example, it's unclear whether one was accrued. It isn't the year-end that matters, it's the difference between the invoice date and the payment date.

You need to account for currency gains/losses within your P&L account. There are various ways to account for these gains/losses, depending on how they were accrued (e.g. forward contract or not). However, in most cases, it isn't difficult. You have an accountant, right?

[WordIsBond]

You really need an accountant. You can ask him/her how it works. The answer should be something like this.

Your income for tax purposes on the contract is based on the amount and date you invoice, not the amount you receive or the date you receive it. When the funds hit your account in GBP, if that amount is greater than the amount you invoiced, you have a foreign exchange gain. If it is less, you have a foreign exchange loss.

On your annual accounts, net foreign exchange (or currency) gain/loss should be a separate line in the accounts. It either increases or decreases your net profit, and so increases or decreases your corporation tax liability.

If you are using the interbank rate to calculate the exchange rate on your invoices, you are going to have foreign exchange losses more often than not, because the rate you get will be somewhere between 0.4-3.0% worse (depending on who you use to convert currencies). Sometimes the exchange rates will move in your favour when the client pays, but on average, you aren't going to consistently make up that spread. Hopefully you either set your hourly rates high enough to compensate yourself for the exchange rate risk or put an exchange rate on your invoice that reflects the spread you'll pay.

I will be very happy if $120 is worth £110 by the end of the year. But I'm not counting on it. The fall of the pound last year meant I surprisingly had a very significant currency gain -- I had many payments that were invoiced when the pound was higher than it was when the funds were converted to sterling. I don't expect a repeat this year.

[FrontEnder]

The problem with exchange rates is that there isn't a single source of truth. What are publicised exchange rates are usually an average between buy and sell, so in practice, you're highly unlikely to get that rate.

Personally, I'd try to get clients to agree payment in GBP so you remove any risk of exchange rate differences. Their bank should be able to make a transfer in GBP and they will convert before sending, so you receive the right amount.

[Lance]

read this and use Free Agent
Working with foreign currencies in your accounts  

One thing it says is "you’re preparing accounts to submit to the UK authorities, whether that’s Companies House or HMRC or both, these accounts must always be stated in pounds sterling"

Another article here, albeit related to CGT rather than CT https://www.taxation.co.uk/articles/...y-calculations
suggests that you "convert that sum into sterling using the exchange rate at the date of disposal". On that basis I would say that you use the international published rate (that you'd never get).
It also says "sterling is the only currency that can be used for calculating a capital gain and any conversion into sterling must be applied to each element within the capital gain and not just to any overall gain or loss on the disposal". So you do the calculation at time of invoice (if invoice accounting).

[TheCyclingProgrammer]

It sounds like you've got the right idea. You do need to track the currency gains and losses between the invoice date and payment date.

At the end of the financial year if you've made a net currency gain it will be taxable if you've made a net loss it will reduce your taxable income (i.e. It's a tax deductible cost).