Too lazy and fat to export? Or do we need just a bit more support?

21 September 2016

The trade secretary, Dr. Liam Fox, this month accused British businesses of being too lazy and fat to export overseas. He intimated that business leaders would rather work on their golf swing than try to increase exports. With the value of UK Sterling languishing in the doldrums I can understand the timing, but if this is part of some wider strategy to galvanise British industry, I have to question the methodology.

Without wishing to be accused of being too lazy or too fat to offer advice on exporting, I thought I would write a few posts on the subject, addressing some of the practical VAT issues facing businesses that are new to exporting.

This first article is on invoicing in different currencies.

There are a couple of sections in VAT law that guides us on the use of foreign currencies.

Firstly, under the valuation rules, any supply that is not expressed in Sterling must be converted to Sterling when trying to ascertain its value. The same rules also refer to a public notice published by HMRC, and the relevant public notice here is notice 700, specifically paragraph 7.7 which is given the force of law.

The notice uses fairly broad language and tells us that, “for VAT purposes, amounts of money must always be expressed in sterling.” Before you stop reading and tell yourself you’ve already reached the point of this article - as always in VAT, there’s a little more to it.

The VAT notice goes on to tell us that any conversions must be performed as follows:

  • (a) You must use the UK market selling rate at the time of the supply. The rates published in national newspapers will be acceptable as evidence of the rates at the relevant time.
  • (b) As an alternative, you may use the period rate of exchange published by HMRC for customs purposes - you may adopt this alternative for all your supplies or for all supplies of a particular class or description. If you opt for only a particular class or description, you should make a note of the details in your records at the time of adoption.

You do not need to notify HMRC in advance if you wish to adopt this alternative, but having made such an option, you cannot then change it without first getting HMRC’s agreement or:

  • (c) You may apply in writing to the VAT Written Enquiries Team to use a rate - or method of determining a rate - which you use for commercial purposes but which is not covered by (a) or (b).

Whatever rate or method you adopt, the appropriate rate for any supply is that current at the ‘time of the supply’.

The key point here is that if you need to arrive at a value for VAT purposes it has to be converted into sterling using the methods specified. Contrary to the opening line, it isn’t trying to say that whenever you are expressing monetary figures, for example on an invoice, that they have to be expressed in Sterling.

When would this apply? A good example of when this is relevant is when you are purchasing supplies from overseas and need to figure out the value for ‘reverse charge’ or ‘acquisition tax’. In such situations you would need to know the appropriate Sterling value, and paragraph 7.7 shows you how to get to it.

When it comes to invoicing, there are specific rules found under The VAT Regulations 1995 that tell us exactly what an invoice should look like. Since 2004, the regulations have stated that you may invoice in “any currency” but the amount of VAT chargeable has to be expressed in Sterling. So, based on this, only the VAT element on an invoice needs to be in Sterling. 

Why would we need to do this? Well, assuming that both the supplier and the customer have UK VAT returns to complete, if the supplier used a different exchange rate to the customer, the output tax on the supplier’s VAT return would not match up with the input tax on the customer’s VAT return. It follows that HMRC could get short-changed if the amounts were discrepant.

Ok, so how do we arrive at the Sterling value of the VAT? The same methodology specified in paragraph 7.7 notice 700 will be fine. HMRC’s online guidance indicates that you can also use the European Central Bank’s rate as a further option.

And there you have it. In case the mystery of how to invoice in foreign currencies was a wedge between you and export success, you can putt it all behind you and get a slice of the action. I’ll see you on the green when you’re done!

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