I run a UK based digital advertising business and we trade a lot outside the UK.
I trade in USD and GBP. Default currency is set to USD but I also process domestic transactions in GBP.
When I printing a VAT calculation worksheet, I’ve just realised that although the worksheet shows the numbers in GBP with a £ sign next to them, the actual figures are pulled through in USD.
Therefore, when I submitted my last return for a £35k refund, the 35k amount was actually a USD amount and I should have submitted a return for something in the region of £27.7k.
Fortunately, I also found that I missed off some purchase invoices which brings the refund back to the amount I’ve actually reclaimed. So no over reclaim but glad I found it when I did or it could have got out of hand.
Anyway, I wondered if I’ve set this up wrong or if there’s a way of producing a VAT worksheet that spits out the correct figures in GBP or will just have to do a manual conversion every quarter in order to ensure I reclaim the correct amount?
If you are filing your taxes in the UK, you should set base currency to GBP. Localizations for the UK are hard-coded for GBP, not USD. You can still denominate customers, suppliers, employees, and bank accounts in USD.
Unfortunately, it could. Numbers you have entered into forms are presumed to be in the currency set as your base currency unless, for example, you are entering a sales invoice for a customer in a foreign currency. Then, the numbers are presumed to be in the customer’s currency. (This is why the currency shows in transactions.) Or, if you make a payment from a USD-denominated bank account and switch base currency to GBP, the payment remains in USD because the bank account was not changed.
I you change the base currency now, none of the numbers you entered will change. But numbers that were converted to base currency for balance-sheet purposes will change, because they will now be presented in the new base currency according to the exchange rate in effect. In some cases, you could end up with something you entered as 50 USD now being 50 GBP. But numbers like Accounts receivable balances for individual customers won’t change, because they were always in the customers’ currencies. Yet the overall Accounts receivable balance will change because the customer subaccounts will be converted to a different currency. Complex, eh?
You will need to be very meticulous in your conversion. Be sure to make a backup before you start. You might want to re-enter all your transactions in a new business with the correct base currency setting. At a minimum, you will need to carefully check every account balance, scan through all transaction lists, and so forth.
Coincidentally, there is another discussion going on right now on this very subject: Employee clearing account. You might find it useful.
Brilliant, thank you - very helpful. In view of the fact that this only really applies to my VAT return I may leave as is and do a manual conversion just for the next two returns. Then in Feb, my new financial year, I will switch to a new base currency in a new business which means I only have to make sure I carry over the correct opening balances. Many thanks for your help.
That is a reasonable approach. Also an opportunity to review how well the design of your chart of accounts has worked for you, since you will be able to rid yourself of accounts you don’t like, despite having entered transactions with their predecessors. Income and expense accounts can simply be abandoned. Balance sheet accounts can be divided or combined before entering starting balances.
Rename the original business to make its archival nature clear and keep it active for looking up historical information.