You may use the monthly exchange rates published by Her Majesty Revenue and Customs (HMRC) to translate your foreign currency transactions into Pound Sterling (GBP) for your VAT, corporation tax and company accounts.
2020 and 2021 exchange rates
| 2020 HMRC monthly exchange rates | 2021 HMRC monthly exchange rates |
|---|---|
| January 2020 | January 2021 |
| February 2020 | February 2021 |
| March 2020 | March 2021 |
| April 2020 | |
| May 2020 | |
| June 2020 | |
| July 2020 | |
| August 2020 | |
| September 2020 | |
| October 2020 | |
| November 2020 | |
| December 2020 |
Translate foreign currency transaction into GBP for VAT
Say you bought an equipment from Malaysia for Ringgit Malaysia 55,000 on 31 December 2020. You settled the invoice on 8 January 2021. The exchange rate on 31 December 2020 from Ringgit Malaysia to Pound Sterling was 5.4369 and the rate on 8 January 2021 was 5.4683.
For accounting purposes, to record the purchase of the equipment based on the invoice received on 31 December 2020 are as follows:
| Debit | Credit | |
| Equipment | £10,116.06 | |
| Trade Creditor | £10,116.06 | |
| Purchase of equipment from Malaysia (MYR55,000 @ ex rate 5.4369) |
Double entries based on the payment to settle the invoice for the purchase of the equipment on 8 January 2021 are as follows:
| Debit | Credit | |
| Trade Creditor | £10,116.06 | |
| Bank | £10,057.97 | |
| Gain on foreign currency | £58.09 | |
| Payment made to Trade creditor in Malaysia re: equipment (MYR55,000 ex rate @5.4683) |
If you are reporting your VAT using the cash accounting scheme then you would report £10,057.97 in your VAT return. Otherwise, you report £10,116.06 under the standard VAT scheme which is based on accruals basis.
Foreign currency transactions in your company accounts
Besides, translating and reporting your VAT transactions to HMRC correctly, when comes to preparing your company accounts for Companies House, you must also include an accounting policy note in your company accounts relating to foreign currency transactions. This is required under the Financial Reporting Standard (FRS) 102.
an example of an accounting policy on foreign currency transactions can be as follows:
Assets and liabilities in foreign currencies are translated into sterling at the rates of exchange ruling at the balance sheet date. Transactions in foreign currencies are translated into sterling at the rate at the date of transaction. Exchange rate differences are taken into account in arriving at the operating result.
Another important document you must submit to Companies House is the Confirmation Statement.
