Invoicing in foreign currencies
If you conduct business internationally, there may be times when it is natural to invoice your customers in a foreign currency. Much like invoicing in a foreign language, invoicing in another currency is usually seen as a courtesy to your customer and can make it easier for them to pay, but it does involve a bit more work on your behalf.
Issuing invoices in foreign currencies helps you to provide superior customer service, demonstrate that you’re willing to go the extra step, and can minimise confusion between yourself and your client.
So whether you have a large international client base or only occasionally sell to customers abroad, it’s important that you understand whether you can invoice in another currency, how to convert your prices, and how to deal with any discrepancies in exchange rates.
Whenever you issue an invoice in a foreign currency, you need to ensure;
Foreign currency invoices are legally compliant with your country’s regulations
If compliant, your prices are accurately converted into the foreign currency using an up-to-date exchange rate
Any variations in the exchange rate that lead to exchange gains and losses are accounted for so your books still add up
Before you decide to invoice in a foreign currency, it’s necessary to check what the legal requirements are in your country. Invoices are legal documents and therefore must follow specific invoicing rules to be legally enforceable and these can vary depending on where your business is located.
It’s always worth checking your country’s rules with your national tax authorities before issuing an invoice in another currency.
In the UK, there are relatively few restrictions, and businesses can issue invoices in any currency they like. The only thing to bear in mind is that if VAT is due in the UK, the total amount of VAT needs to be shown in Great British Pounds. Specifically, you must show in sterling:
The total net value of goods and services at each VAT rate
The amount of VAT (if applicable) at each rate.
It is not necessary to show sterling figures for each line on the invoice, however.
One of the most important things to get right when invoicing in another currency is the exchange rate. You need to ensure that you use an up-to-date exchange rate so that your prices are accurate and you don't over- or undercharge your customer.
There are 2 standard ways of converting your prices into a foreign currency:
You can use the mid-market selling rate at the time the invoice is issued. The mid-market rate, also known as the “interbank” or “middle rate”, is the midpoint between the buy and sell prices of any two currencies at any time. These rates are constantly changing, and therefore, the mid-market rate is also always changing. The formula for the mid-market is: mid-market = (bid rate + ask rate) ÷ 2.
You can use the foreign currency rates published by HMRC. This is known as the ‘period rate of exchange’.
Make sure that you convert both individual prices for specific items and invoice lines, as well as the total amount due. If you charge tax, it can be helpful to have the amount of tax due in the converted currency but – as previously mentioned – you may also need to show tax in your local currency.
Exchange rates are always changing, and it’s fairly common for an exchange rate to change between issuing an invoice and receiving payment. If this happens, you’ll encounter something called an exchange gain or loss, which occurs when you either receive too much or not enough money due to changes in exchange rates.
For example, you’re based in the UK but have a customer in Denmark. You make a sale worth £50 and want to issue the invoice in Danish kroner. On the day you create the invoice, £1 is worth 8.31kr so, when converted, the total amount due is 415.5kr. The customer pays two weeks later, but between issuing the invoice and receiving payment, the exchange rate has changed. £1 is now worth 8.35kr, which means that the 415.5kr you receive is now worth £49.76. You therefore encounter an exchange loss of £0.34.
If you do decide to invoice in different currencies, it’s likely that you’ll experience exchange gains and losses, and you’ll need to ensure that any gains or losses caused by changes in exchange rates are reflected in your accounting records. The exact way of handling an exchange gain or loss depends on whether the exchange rate has increased or decreased, and whether the gain is realised or unrealised.
It’s important that you keep an accurate record of any exchange gains or losses your business encounters from invoicing in foreign currencies. If you find you do not receive the full payment on an invoice due to fluctuating exchange rates, the outstanding balance should be recorded as an expense. Equally, if you are overpaid on an invoice due to exchange rate changes, this can be recorded as ‘Other income’.
If you are a UK business that operates internationally, it may be necessary to create invoices in foreign currencies. Whilst B2B sales may often operate across currencies, B2C sales may benefit from converting prices into your customer's local currency. It may improve your communication with your customer, reassure them about the price they are paying, and demonstrate that your business is customer-focused.
If a customer receives their invoice in their local currency, this may actually speed up payments and therefore increase your business’ cash flow. Generally, converting your prices into a foreign currency can make it easier for customers to understand and assess your prices.
This is especially true when a customer requests a quote. Just like foreign currency invoices, it’s also possible to create quotations in foreign currencies. By quoting your customer in their local currency, your prices will immediately make sense to them and they will be able to compare your quote with competitors.
If you choose to quote your customer in their local currency and it is accepted, it is expected that the invoice will also be given that currency. Consistency is important.
Here is what you need to remember when your UK business invoices a customer in a foreign currency:
Whilst you can send your invoice in any currency, UK VAT still needs to be shown in GBP. This can be shown separate from the cost breakdown, as long as it is stated on the invoice.
You should use an up-to-date exchange rate, either those published by HMRC or the mid-market selling rate at the time the invoice is made.
Any exchange gains and losses you incur must be accounted for as ‘other income’ or as an ‘expense’.