| Pages in topic: < [1 2 3 4 5 6] > | How to avoid exchange rate loss? Thread poster: Wendy Cummings
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Tom in London
United Kingdom
Local time: 12:16
Member (2008)
Italian to English
Sonia Atkinson wrote: no charge at all for payments in euros BTW).
Ah, but they give you a more unfavourable exchange rate. I did look into this, in the hope that there might be an altruistic bank out there that doesn't charge for foreign currency transactions and just loves me so much that unlike all other banks, they'll do it for me every time for nothing.
But there is no such animal, I'm afraid.
| | | | Sonia Hill
United Kingdom
Local time: 12:16
Italian to English
| Reply from my accountant | Jul 13, 2010 |
As I was a little worried about this, I consulted my accountant and this is his reply if it is of any help to you:
"You are quite correct in calculating your turnover from foreign currency. Your income should be based on the amount you eventually receive in sterling.
Regarding accruals your annual income for tax purposes should relate to the invoices you have raised during the year regardless of whether or not you have received payment by the year end. For example if ... See more As I was a little worried about this, I consulted my accountant and this is his reply if it is of any help to you:
"You are quite correct in calculating your turnover from foreign currency. Your income should be based on the amount you eventually receive in sterling.
Regarding accruals your annual income for tax purposes should relate to the invoices you have raised during the year regardless of whether or not you have received payment by the year end. For example if your year end is 31 March and an invoice raised on 15 March was not paid until 15 May the total invoice should be included in your accounts to 31 March. When you come to do the next accounts year you will then need to deduct any invoices raised and included in the previous year which were paid in the current year." ▲ Collapse
| | | | | Just curious | Jul 13, 2010 |
RobinB wrote:
Wendy,
The way you describe it, you're using accrual accounting, as you appear to be booking the transaction (and translating the euro amount) when the invoice is issued, not when it's paid. I think most translators will be using cash-based accounting, under which the amount and exchange rate are recorded in the books on the date cash is received (or an entirely different, e.g. composite, exchange rate is applied, for example under tax rules).
When I read your post, I thought exactly the same thing - but I am the first to admit that I am completely ignorant of UK tax methodologies and regulations.
Does the law require you to use accrual accounting? If not, what is the benefit you get from applying this? I'd add my voice to Robin's in this, in that it would seem to me that this type of exchange rate problem would be remedied by using cash-based accounting (or, as I found on this HMRC website, "cash accounting": Cash accounting)
| | | | Wendy Cummings 
United Kingdom
Local time: 12:16
Spanish to English
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TOPIC STARTER | accrual accounting | Jul 13, 2010 |
Janet Rubin wrote:
Does the law require you to use accrual accounting?
The only reason I use this method and have not questioned it, is that it was one of the first pieces of advice my accountant gave me, and I have followed it ever since, assuming that was just "how i was supposed to do it".
And so, rightly or wrongly, that is what I have done!
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Wendy Cummings
United Kingdom
Local time: 12:16
Spanish to English
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TOPIC STARTER
Sonia Atkinson wrote:
Regarding accruals your annual income for tax purposes should relate to the invoices you have raised during the year regardless of whether or not you have received payment by the year end.
This is what I was told too. But it therefore means that you pretty much have to use the accural basis, surely? Since if you are only accounting the sterling amount once you receive payment, this would not be possible if an invoice is not paid in the same tax year that it was issued.
| | | | Ronald van der Linden (X)
Mexico
Local time: 06:16
German to Dutch
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| Client management & control | Jul 13, 2010 |
I think perhaps you would need to work on client management and point out payment terms. Waiting over 60 days or more, is not standard, not even with regular clients.
I have clients in the UK, the Netherlands, Germany, France, Belgium, Italy and Greece, and I have only noticed that in Belgium, clients would prefer paying after 45 days or 30EOM, the others pay (well) within 30 days as I make sure that prior to accepting a project the client has agreed on price and payment terms, and... See more I think perhaps you would need to work on client management and point out payment terms. Waiting over 60 days or more, is not standard, not even with regular clients.
I have clients in the UK, the Netherlands, Germany, France, Belgium, Italy and Greece, and I have only noticed that in Belgium, clients would prefer paying after 45 days or 30EOM, the others pay (well) within 30 days as I make sure that prior to accepting a project the client has agreed on price and payment terms, and I have never had a problem collecting money. I simply send out a reminder on day 30, and the client pays up within 3 days after that (especially as within the EU, payments in EUR are processed within 1 or 2 business days). For larger projects, (> 1000 euros) I ask 25-50% upfront, especially with new clients. If the client cannot agree with my terms, I kindly reject the offer and blacklist the client in my own administration.
In the Netherlands most companies offer a 2% discount if the client pays the invoice within 7-14 days. This could also be an interesting approach.
Asking clients within the EU to pay in pounds would imply additional wire costs (if I'm not mistaken) for both yourself as your client, but would eliminate the currency exchange issue.
My base currency is the euro, regarding my US clients paying in USD, I usually charge them more than I would with clients paying in euros, and I let them choose by showing the USD and the EUR fee. UK clients always have paid in euros; I have never had an issue that they would prefer paying in pounds.
You could also use factoring services: http://en.wikipedia.org/wiki/Factoring_(finance) where you would sell your accounts receivables at less than 100% value. ▲ Collapse
| | | | Ronald van der Linden (X)
Mexico
Local time: 06:16
German to Dutch
+ ...
| cash / accrual administration not relevant for avoiding exchange rate losses/gains | Jul 13, 2010 |
Sonia Atkinson wrote:
As I was a little worried about this, I consulted my accountant and this is his reply if it is of any help to you:
"You are quite correct in calculating your turnover from foreign currency. Your income should be based on the amount you eventually receive in sterling.
Regarding accruals your annual income for tax purposes should relate to the invoices you have raised during the year regardless of whether or not you have received payment by the year end. For example if your year end is 31 March and an invoice raised on 15 March was not paid until 15 May the total invoice should be included in your accounts to 31 March. When you come to do the next accounts year you will then need to deduct any invoices raised and included in the previous year which were paid in the current year."
This answer implies that regarding cash/accrued based accounting, tax laws between the UK and the Netherlands are quite similar.
Yes, under cash based accounting, revenue is only administered based on invoices during year-end, throughout the year you would enter your revenue based on bank statements. Your tax declarations are based on bank statements (=moment your receive / pay cash, not the moment you issue or receive invoices), except during the last period of the fiscal year.
FYI, using cash administration or accruals administration is not relevant regarding your issue of exchange rate losses/gains. They are just 2 different ways of keeping the books. Usually, for smaller companies, regarding fiscal annual accounts, cash administration is required and not accrual administration. (Please note there could be a difference between your commercial or financial annual statements vs. fiscal statements required by your national Treasury Office; well at least in the Netherlands there can be, and this is exactly due to using cash based accounting for fiscal statements and using accrual based accounting for financial statements.
Edited to add the following:
If one has used "accrual based accounting", I see no need for changing that, but the definition of accrual based accounting is not only that you base your revenue or costs on invoices instead of cash flows (=bank statements), but that you would (re)value your assets based on fair value, and other topics, who are commonly not allowed in fiscal annual statements/tax declarations!
What usually is the case, is that a "light" version of "accrual based accounting" is used (or simply put: cash based administration with a debtor/creditor sub-administration). Revenue and cost book entries are based on invoices instead of cash flows (bank accounts), but all other issues (e.g. (re)valuations, amortisation) are valued at cost price and not at market/fair value, etc. (=cash based administration).
The use of a debtor/creditor sub-administration is recommended by accountants, not because it's necessary for tax declarations, but because in itself it is a "alert and tracking system" and offers a control for checking the "completeness" your revenue. (Making the accountant's work easier!)
By using a debtor/creditor sub-administration that is incorporated in your administration system, you would know at any time the total outstanding amount and details per invoice or client, which you need to receive from clients or pay to providers/suppliers, and whether you receive/pay on time. Usually with this sub-administration, you can also easily create invoice reminders to send to your clients.
Keeping an administration with an integrated debtor/creditor administration is efficient and generally saves administration time as you do not enter bank statements and keep track of your invoices being paid or creditors being paid on time in a separate excel sheet. The more clients/invoices you have, the more it is recommendable to implement a sub-administration for debtors and creditors.
The only issue (!) could be, when declaring taxes on a monthly basis, is that you would be declaring/paying taxes 2 months earlier (!) (with a 60 days payment term) than you would when using bank statements to base your revenue on (the moment you receive cash). This basically is the reason why smaller companies do not have to use accrued based accounting, as they would be paying taxes before actually having received payments.
It is my guess that the integrated tool of a debtor/credit administrator is not being used to its fullest capabilities as the thread starter mentions she has to wait over 60 days to receive payments, and worse, she thinks it normal. Hence my previous post regarding client management and control.
[Edited at 2010-07-13 23:32 GMT]
| | | | | Cash accounting recommended for freelancers | Jul 14, 2010 |
Accrual accounting is far more complicated than cash accounting. I agree with previous posts which highlighted at least two areas where accrual accounting leads to immediate accounting nightmares:
a) Having to pay income tax on income invoiced but not yet received towards the end of a fiscal year (not to mention potentially unrecoverable if a client proves to be uncreditworthy).
With cash based accounting, you simply don't book unrealized earnings. In any case, unreali... See more Accrual accounting is far more complicated than cash accounting. I agree with previous posts which highlighted at least two areas where accrual accounting leads to immediate accounting nightmares:
a) Having to pay income tax on income invoiced but not yet received towards the end of a fiscal year (not to mention potentially unrecoverable if a client proves to be uncreditworthy).
With cash based accounting, you simply don't book unrealized earnings. In any case, unrealized earnings cannot be claimed as a business loss (at least in India), so there is no question of forfeiting any potential tax deduction. If unrealized earnings can be claimed as a business loss, your tax return can always be amended (messy, but doable) instead of using accrual accounting to benefit from the deduction.
b) Having to deal with differences in the local currency equivalent of the amount invoiced and amount actually received in the local currency by recording both invoiced amount and received amount in the financial statements.
My invoices (mostly in EUR) state the EUR account invoiced. My bank statement shows the value converted into the local currency (rupees). I include only the latter figure in my annual income. It's really simple, and does away with having to keep track of exchange rates and invoiced amounts in local currency at the time of invoice.
I'm sure large corporations find accrual accounting profitable. Is it worth the while for small enterprises such as freelance translation service providers? I think not. ▲ Collapse
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Claire Cox
United Kingdom
Local time: 12:16
French to English
+ ...
Sonia Atkinson wrote:
Regarding accruals your annual income for tax purposes should relate to the invoices you have raised during the year regardless of whether or not you have received payment by the year end. For example if your year end is 31 March and an invoice raised on 15 March was not paid until 15 May the total invoice should be included in your accounts to 31 March. When you come to do the next accounts year you will then need to deduct any invoices raised and included in the previous year which were paid in the current year."
This is exactly what my accountant has told me too. I used to do cash-based accounting, but I was advised to change a few years ago when the regulations changed. It now just means that I tend to wait until my last invoices for the previous tax year have been paid - which can mean June in some cases, depending on clients - before I submit my tax return, but you're under no obligation to submit your tax return immediately anyway. In fact my accountant seems to think I'm very efficient getting it all done by May/June!
| | | | | Again, just curious (slightly OT) | Jul 14, 2010 |
I'm just wondering if anyone here using the accrual accounting method is aware of any benefits they're actually getting by using this instead of cash accounting.
Every time I look this up, the particular "advantages" only seem to be relevant to larger businesses, especially those with product-related expenses.
"What benefit does accrual based accounting provide? Actually, quite a few if you happen to be a mid-sized business and you need to keep an accurate picture of ... See more I'm just wondering if anyone here using the accrual accounting method is aware of any benefits they're actually getting by using this instead of cash accounting.
Every time I look this up, the particular "advantages" only seem to be relevant to larger businesses, especially those with product-related expenses.
"What benefit does accrual based accounting provide? Actually, quite a few if you happen to be a mid-sized business and you need to keep an accurate picture of your company’s profitability on a regular basis. A few of the additional benefits are: greater focus on the business output, not the input; more cost-effective and efficient use of resources; the full cost of providing your product or service can be compared across industry standards; improved accountability and better financial management, just to name the most common."
Accrual Based Accounting
Measuring my "profitability" on a regular basis isn't a particular necessity for my "small business" - especially since other than occasional travel and office rent, my expenses are fairly low, and I don't plan on applying for any business loans any time soon.
Anyone out there care to comment? ▲ Collapse
| | | | Claire Cox
United Kingdom
Local time: 12:16
French to English
+ ...
| Commission charges | Jul 15, 2010 |
Tom in London wrote:
Sonia Atkinson wrote: no charge at all for payments in euros BTW).
Ah, but they give you a more unfavourable exchange rate. I did look into this, in the hope that there might be an altruistic bank out there that doesn't charge for foreign currency transactions and just loves me so much that unlike all other banks, they'll do it for me every time for nothing.
But there is no such animal, I'm afraid.
Actually, I wonder whether there still is such a difference between the exchange rates offered by banks who charge commission on incoming currency payments and those who don't? I bank with NatWest too and I've noticed that the exchange rates I've been getting recently don't seem much different from the tourist rates quoted in the press, whereas before we used to get a so-called commercial rate. I've tried to pin banks down before as to the rates they actually charge, but it's very hard to make a comparison without going to all the effort and upheaval of moving your bank account. (I've done that before to Abbey National as it then was, who promised no charges, only to slap on £21 by way of "intermediate bank charges" as they weren't a clearing bank - talk about misrepresentation!)
My last currency transfer came into my account on 2 July and was processed at a rate of 0.805489 (Euro/Sterling). I also paid commission of £7 to NatWest, but as the sum was quite large, that wasn't a problem in this case. I wonder whether anyone with a bank account which doesn't pay commission received any payments on or around this particular date and can tell us whether the rates they received were comparable?
Claire
| | | | Claire Cox
United Kingdom
Local time: 12:16
French to English
+ ...
Janet Rubin wrote:
I'm just wondering if anyone here using the accrual accounting method is aware of any benefits they're actually getting by using this instead of cash accounting.
Anyone out there care to comment?
I just know that I was advised by my accountant (in the UK) to switch to this as cash accounting was no longer acceptable to the Inland Revenue for small businesses. The transitional period was a complete pain as it looked as though I'd had a very good year with 13 months of payments initially. However it seems to be working fine now I'm into the system - and as you only pay tax in arrears, it doesn't mean that you're actually paying tax that you haven't yet received by the time you pay the tax bill.
Claire
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| Don't mean to beat a dead horse... | Jul 15, 2010 |
Claire Cox wrote:
I just know that I was advised by my accountant (in the UK) to switch to this as cash accounting was no longer acceptable to the Inland Revenue for small businesses.
I totally believe you, but did you happen to double check this? I mean - I know nothing about it - but the link I inserted in my first post
Cash accounting/HMRC Reference:Notice 731 (July 2008)
seems to be current, and seems to indicate that it's perfectly valid to use the cash accounting system, at least for VAT purposes.
I'm not advocating a switch back even if you can, I'm just wondering if what your accountant told you was accurate, because if you look up "cash accounting" and "inland revenue", there seem to be all sorts of references, and I haven't found anything stating it can't be used. There's also this: The VAT Guide/19.3 Cash accounting scheme
Are you a sole proprietor, or have you formed an organized business? That might make a difference...Well, either way, glad it's working out for you!
| | | | | Good idea, but... | Jul 15, 2010 |
Tom in London wrote:
Buy £1m Euro at today's rate, then sell them when the exchange rate drops. Even if the difference is 0.01% you've made a lot of money. I think that's basically how it works. My next-door neighbour calls himself a "currency trader". This is what he does. I'd use a different word to describe what he does.
Unless you have a crystal ball, you might call it wrong. And don't forget that you'll have to pay rollover charges, and financing charges if you use a leverage product, if you hold your position overnight.
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Claire Cox wrote:
My last currency transfer came into my account on 2 July and was processed at a rate of 0.805489 (Euro/Sterling). I also paid commission of £7 to NatWest, but as the sum was quite large, that wasn't a problem in this case. I wonder whether anyone with a bank account which doesn't pay commission received any payments on or around this particular date and can tell us whether the rates they received were comparable?
I did not, but I do now keep a spreadsheet comparing the rates I get on various methods of xfer* to try to see which is the most cost effective when all fees etc are factored in. My 'baseline' rate is that given for xe.com under its history data.
My "no commission" (i.e. no separate fee) xfer means an internet transfer from Soc Gen to HSBC. This is typically at a rate 1.5 to 2 eurocents less than xe.com. So if xe.com says it was 0.82857 on July 2nd (which it does!) I would have expected to get 0.81-ish. Soc Gen's limit for internet xfer is €4k, I think.
*Other methods - Conversely, if I had paid Soc Gen 50-odd euros for a xfer order through the mail (i.e. letter with signature), I would expect to have got around 0.825, as they typically only knock about 1/3 of a eurocent off. No fees HSBC end.
However, I have recently discovered or realised there is another option to split the fees between Soc Gen and HSBC for this kind of xfer, then Soc Gen take 30-odd euros and HSBC only 6 quid. But the exchange rate I get is then not as good as when all the fee goes to Soc Gen, altho it is better than the internet xfer rate. On 2 July, I would probably have got 0.82.
Hope that helps!
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