What Exchange Rate To Use For Foreign Currency Invoices From Domestic Suppliers

Do I have to use the exchange rate on the supplier invoice when entering a domestic invoice with a foreign currency.

Most ERP systems, good ones at least such as Oracle and SAP, will allow you to enter and store an exchange rate to use for your foreign currency invoices so that the foreign currency will then be automatically converted to your ledger currency when posted. There are also times when you may receive a foreign currency invoice, USD is the most common scenario, from a domestic supplier and VAT is charged because the sale is within the same country.

The problem

There is a risk here as the exchange rate used by your supplier needs to be exactly the same as your exchange rate when entering the invoice. Using a corporate of default rate may cause you problems and leave you non compliant and here is why;

Lets say VAT is 20% and you receive an invoice for $1200, with $1000 as the expense and $200 as the VAT determined by your tax engine. If the supplier used an exchange rate of 1.5 to 1 then the VAT converted to GBP would be £133.33 and thus the VAT they have reported to HMRC is also £133.33 for this sale. Now, if the purchasing company had a corporate exchange rate of 1.3 to 1 then they would record the same $200 as £153.85 and thus recover this same amount from HMRC. So the supplier pays HMRC £133.33 and the Purchaser recovers £153.85 meaning that HMRC are out of pocket for £20.52, and HMRC don’t like to be out of pocket and whilst £20.52 may not sound much, it would be if the invoice was for $1,200,000.


So the traditional approach, certainly if you are using Oracle or SAP, is to use a SPOT or USER rate that is entered manually and taken from the supplier invoices (the supplier is legally obliged to put the exchange rate used for VAT purposes). However, one of our clients has permission from HMRC to use their corporate rate so if your ERP system wont allow you to change the exchange rate on entry of your invoice then it should be possible to get a letter from your authorities to allow you to use the corporate exchange rate. Be warned however, unless you have permission to use a corporate exchange rate, then you must use the same exchange rate shown on the supplier invoice or risk being non-compliant.