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WHY IT’S IMPORTANT TO UNDERSTAND HMRC SPOT RATES FOR TAX
TaxScouts -> Guides
* 3 min read
* Last updated 20 Sep 2022
Before we break down the importance of why it’s super important to understand
HMRC spot rates for tax, we can only imagine that you must be wondering ‘what on
earth are HMRC spot rates?’
A spot rate is the real-time price at which you can exchange one currency for
another. The key word is real-time as spot rates change literally every second.
ENGLISH, PLEASE?
We know it’s a lot to take in at once! So as always, we’ve broken it down to
make it as simple as possible so that you won’t pull a brain muscle trying to
wade through jargon:
* Your business offers services abroad
* You now have foreign earnings from these services
* You can’t spend foreign money, so you need to convert it all to GBP (UK
currency)
* There is a cost for trading this (or any) currency
* The price is determined by many factors including the time
* The given price at this precise moment is called the ‘spot rate’
WHAT’S AN EXAMPLE OF SPOT RATES?
We knew you’d ask! Here’s an example of how a spot rate works:
✈️ Janie is going to Turkey for a holiday soon. The national currency in Turkey
is the Turkish Lira, so Janie needs to buy some so that she can buy souvenirs
whilst abroad – so she takes a trip to her local bureau de change.
💱 When Janie gets there, she buys £200 worth of Turkish Lira which gives her
4,184.87 to spend – this is the spot rate.
🏖️ She has a blast whilst on holiday and decides to book the same holiday for
the next year, however, her £200 only buys her 3,571.78 Turkish Lira the next
time around – this is because the spot rate has changed.
WHERE DOES HMRC COME INTO ALL OF THIS?
When HMRC is mentioned, it’s usually for one reason – you guessed it, tax! For
any business that has foreign earnings, it is a good idea to get familiar with
the HMRC spot rates for the sake of tax, here’s why:
* When filing your tax return, all earnings must be translated to GBP
* Spot rates can have a huge impact on the amount of tax you pay
* If you aren’t careful, spot rates can ultimately sink your business
WHAT SPOT RATE DO I USE FOR TAX RETURNS?
Many people opt to use conversion calculators to convert currencies, HMRC also
makes converting foreign earnings a little easier by publishing extensive lists
of:
* Monthly rates that date all the way to 2012
* Yearly averages and spot rates that date back to 2016
Our personal advice is none other than to seek advice if you’re looking to
understand this further!
WHAT’S THE DIFFERENCE BETWEEN SPOT RATES AND FORWARD RATES?
Now you know what spot rates are, you may be wondering ‘how are forward rates
any different?’
There’s one key difference between spot rates and forward rates – the time. We
know that spot rates are dependent on real-time, but forward rates are actually
based on the future.
Here’s a quick example:
* The spot rate for your product is £20
* A buyer wants to purchase your product in six months’ time
* You can decide that in six months’ time your product will cost £25
* This is the forward rate
* Should the spot price of your product fall, the buyer will still pay the
agreed forward rate
TOO MUCH TO TAKE IN?
We get it, it can be really confusing – but on the bright side, our accredited
accountants provide expert advice on all things tax! Get in touch if you want to
book a consultation.
SEE MORE ON:
* capital gains tax
* hmrc
* self-employed
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