What exchange rate should we use for on our Sales invoice to US customer after initial pro-forma issued?
We issued a pro-forma invoice, the US customer paid 3 days later. The customer is due to collect the goods next week. We will issue our commercial invoice on the day of collection. What exchange rate should we use?
1. The rate on the initial pro-forma?
2. The rate on the date the payment was received?
3. The rate on the day of collection/commercial invoice date?
Any guidance much appreciated.
Is your customer (US based) paying you in USD or GBP. From what I can gather, you need to provide the customer with an exchange rate (GBPUSD) which is then converted from USD into GBP and you are paid in GBP.
If you are indeed being paid in GBP (while your invoice is in USD), there is no guidance as to the best practice. Reason is simple, the rate between (1) the initial pro-forma invoice (2) the rate when the payment is received (3) the rate on collection could be vastly different. By that I mean it could either work in your favour (GBPUSD weaker) or against you (GBPUSD stronger). In both cases you are BUYING GBPUSD, it just depends where you are buying the GBP at..
If you are being paid directly in USD and then getting your bank to convert the USD into GBP then the only rate you can use is (2) the rate the funds were exchanged at.
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Hope that helps
I just thought, I found the answer to my own question, but it is slightly different. I moved from Germany to England and now work from England for the same German companies online as freelancer. I am still getting paid in Euro into a German bank account – but now, as I am English resident, I have to submit a record of my business in GBP to HMRC. Which rate should I use for my accounting? The rate on the day my invoice is issued — or the rate of the day I get paid in Euro?
What we do when we file our own company reports to HMRC, is give them the GBPEUR rate when we converted the EUR into GBP, or alternatively if we running a EUR balance we use the year end fixing GBPEUR rate as a reference.
If HMRC use their own rate and you use a different rate which works against you, I would suggest you talk to HMRC and clear this point up with them.
At the end of the day the rate must work in your favour. So I would use the rate on the day you get paid in EUR.
Your only risk is if you fix a rate on the date you get paid the EUR into your account and then a few days/weeks/months later you decide to convert the EUR into GBP the rate would of course have changed and that change could either have worked IN your favour (EUR stronger vs GBP) or AGAINST you (EUR weakens vs GBP). As long as you are aware of the risks involved.
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