Getting tax calculations right for overseas transactions can be a complex – and risky – process.
So, if your business has foreign earnings or gains that it converts into sterling for UK tax purposes, it pays to choose your foreign exchange, or forex, rate carefully.
Bringing down your tax liability
The rate you choose can have a significant impact on the tax you pay – and ultimately, your profitability. More importantly, it can mean the difference between a strong, healthy business and one that falls foul of HMRC.
At Price Bailey we advise clients regularly on the ups and downs of forex rates, so we see first hand the impact they can make. I’ve recently seen two very large examples where differences of opinion over which rate to use led to very different tax outcomes. In one case it made a difference of nearly £100,000, and in another, its impact was even bigger – well over £200,000.
Gaining clarity around your foreign exchange rates
But how can such big variances be possible? It all comes down to clarity or a lack of it. The law in this area isn’t always clear, and even when it is, day-to-day practice tends not to always follow it as closely as you might think.
So where should businesses start when looking at forex rates?
HMRC publishes monthly and yearly averages, which are based on spot rates published by the Financial Times. But the way these rates are used can be contentious. For example, when you’re working out capital gains tax (CGT), you have to use spot rates on specific transaction dates, not the monthly average. In many other cases though, the Financial Times rates are enough.
There’s a whole range of currency conversion calculators online, but it’s always risky to assume you’ve found a site with all the right answers. At Price Bailey, we always use the same source as HMRC – those FT spot rates – and we recommend our clients do the same.
Sound advice pays dividends too, so if forex plays a regular part in your business, work with an experienced tax advisor to make sure you use the most beneficial rate, every time.
This post was produced by Charles Olley, Tax Partner and Financial Director at Price Bailey. To contact Charles about any of the points raised in the article above, feel free to get in touch using the form further below.
We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.