Postponed VAT Accounting & Exchange Rates - Purchase Invoice Value

Accounting
1

Good Morning,

So I have a question surrounding purchase invoices and postponed VAT accounting and Exchange Rates.

So I have an EU purchase invoice from a supplier.

We ordered /purchased the goods in January 2021, we paid the supplier for them in March and the customs declaration was made by a customs agent also in March 2021.

The supplier invoice was in Euro’s.

We paid for the goods using an currency exchange company, so we got a spot rate on the day and they paid the supplier within 2 hours of us agreeing the spot rate.

The way that process works is that you tell exchange company the amount of Euro’s you wish to pay (invoice value) on the day and they give you sterling figure to transfer to them based on an agreed exchange rate/spot rate.

They transfer the directly to your supplier for you.

I have tagged the amount directly to the supplier invoice and set up the ’ currency exchange company’ as a sterling bank account in QF, so it all flows nicely from a paper trail persepctive.

So although my supplier invoice is in Euro’s we have inputted it into QF as sterling amount based on the above spot rate (amount we paid on the day). I know this is incorrect and should now follow the HMRC guidance.

Having read the HMRC guidance, they say that for postponed VAT accounting purposes you should use their published monthly exchange rate.

So here’s my question…

If I enter the purchase invoice into QF as sterling using the published exchange rates by HMRC using the date on the invoice (say 10th of Jan 2021) then pay my supplier 2 months later (say 10th of March) at a different exchange rate, how do we account for that rate difference between the HMRC rate and the actual rate we paid, when factoring in that we used a currency exchange service instead of a Euro bank account.

Currently we have a difference between QF and HMRC declaration regarding import VAT due to the above.

So example of this would be…

Invoice 1:

10.01.21
Supplier Invoice Amount = 2720.44 Euros
HMRC Published Exchange Rate Jan 2021 = 1.1075
Supplier Invoice Value based on HMRC rate = £2456.38 (inputted correctly into QF at this value)

01.03.21
Exchange Service Sent 2720.44 to supplier
Exchange Rate 1.15533
Sterling Amount = £2363.17
Difference between £2456.38 - £2363.17 = £93.21

We have applied the ‘postponed VAT accounting’ rules in QF to the aforementioned supplier invoices.

Many thanks in advance for your help and guidance. Simple layman’s explanations would be very helpful.

Warmest Regards

2

Hi Andy,
I think that would be a good question for your accountant. When he/she tells you what to do and how to account for those figures, I am sure a few people here can tell you how to enter this in quickfile.

What I know from quickfile, they use a company for the exchange rate/calculation as well, which is accepted by hmrc. So I think, you don’t need to follow the exchange rate table from hmrc all the time and to 100%. If your exchange rate company is recognised and accepted by hmrc, I think, that should be okay. But I could be wrong, specially because there are 2 month between invoice and payment. As I said before, your accountant should know an answer. Sorry that I couldn’t be more helpful.

3

Hi, Thanks for the response. I have used the in built exchange rate mechanism in QF before when the invoice is presented in sterling and the payment currency is in Euro’s.

This scenario is slightly different and is more about how how QF uses the HMRC’s fixed rate of exchange to value an invoice and then how QF handles the fluctuation in exchange rate between the time the invoice was inputted into the accounts and when you actually paid for it!

The above HMRC approved exchange rate is used for calculating the import VAT liability.

4

The exchange rate is governed by financial reporting standards rather than by HMRC, and the standards for small entities are classed as ‘the exchange rate in operation on the date on which the transaction occurred; if the rates do not fluctuate significantly, an average rate for a period may be used as an approximation’.

So its perfectly fine to pick whatever exchange rate websites qf decides to use, or could if needed adopt a average rate for the month.

As currency conversion to GBP is done at the transaction stage, its those exchange rates that mattar. So some may find they have more or less compared to the date the invoice was issued.

1 Like
5

Hi @Paul_Courtier ,

Thanks for the response. Again, I am not sure my original question has been answered.

The issue I have is that if you enter a supplier invoice into QF using the HMRC rate at a given point in time, this is also used to estimate your import Vat liability.

So if I bring you back to my original scenario earlier in this thread…

Invoice 1:

10.01.21 (Jan 2021) Inputted supplier invoice into QF Mid Jan as per date goods entered the country roughly around the same time the supplier invoice was dated.

Customs declaration was deferred so goods moved through customs, however declaration had not been made (it can be made in the following 6 months), hence PVA. Supplier Invoice was dated January 2021.

Supplier Invoice Amount = 2720.44 Euros

HMRC Published Exchange Rate Jan 2021 = 1.1075
Supplier Invoice Value based on HMRC rate = £2456.38
(inputted into QF at this value in GBP £)

01.03.21 (March 2021) Paid invoice using currency exchange service.

Currency Exchange Service Sent 2720.44 euros to supplier
Exchange Rate 1.15533
Sterling Amount transfer from working UK account to exchange service = £2363.17

Difference between invoice amount and what I paid 2 months later is £2456.38 - £2363.17 = £93.21

We have applied the ‘postponed VAT accounting’ rules in QF to the aforementioned supplier invoices.

Customs Declaration was then made by freight handling agent mid March after we had paid the supplier.

Customs agent makes the deceleration using the Jan HMRC published exchange rate figures. I now have a difference between what HMRC deem the value of the invoice to be and what I actually paid.

All figures have been inputted into QF in sterling.

@Paul_Courtier the problem occurs when you then get your customs documentation through after the import agent has made a declaration.

The import duty due is calculated at 20% using the January exchange figures, as this was the date that the goods entered the country, so you now have the following problem…

  1. Import Vat liability is different. (PVA applied).

Basically what happens when you use a customs agent to make an import deceleration on your behalf is that they value the goods using the HMRC’s published exchange rate for the month in which you the goods were imported (retrospective), so this takes the flexibility away from the QuickFile user to choose which exchange he or she wishes to use when inputting the European supplier invoice into QF.

Furthermore, lets assume you haven’t used the HMRC published rate for that given month, when your import duty liability comes through it will be different, if you have inputted the supplier invoice at any other rate other than that used by the customs clearing agent (HMRC Exchange rate).

So cutting through it all, if I use the HMRC exchange rate to value the invoice in sterling,
How then do I tag the sterling (GBP) amount that I transferred from my working current account to a currency exchange service who have paid my supplier at different exchange rate to that of the original invoice that I have entered into QF in GBP using the HMRC’s exchange rate for the date of invoice.

Any question back are most welcomed. Hope this makes sense? My head hurts!

6

I understand your question. I’m just not sure I have an answer for you other than one of the qf admins would need to explain what happens with the exchange rate differences. They obviously need accounting for and I’d hope quickfile would have thought about that.

7

In that case you will have to do the currency adjustments yourself.

If you input the purchase invoice into QuickFile in Euros then you could set an exchange rate on that and this would then be the rate used to calculate the GBP values for your VAT return. When you make payment you would log it as a cross currency payment specifying the number of pounds you sent and the number of Euros the supplier received, and QuickFile would automatically record the difference in GBP values as an entry on the currency charges nominal (credit, in this case, since you paid out less than the GBP value of the invoice).

If you’re recording things in GBP then you’d have to do the same by hand. Represent the currency exchange service by a dummy bank account, then tag the money you send to them as a bank transfer to that account, and log the purchase as paid in full from the same account. This will leave a balance on the account (either positive or negative) representing the currency fluctuation, manually create an appropriate in or out transaction to bring it back to zero and tag that to currency charges via “something not on the list”.

1 Like
8

This topic was automatically closed after 13 days. New replies are no longer allowed.

9

First and foremost, it should be noted that I’m not an accountant. It’s usually best to speak with your accountant to ensure this is done correctly, but this guide which we have prepared may help"

https://support.quickfile.co.uk/t/postponed-vat-with-currency-gains-loss/47850