I am cleaning up the debtors and creditors ledger for a client that buys and sells in foreign currency so they both show varying balances outstanding and overpaid due to exchange rate losses and gains. The best way to clear them is to issue additional invoices/credit notes posting them to Exchange rate gains and losses.
Would they be any VAT on these?
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wouldnt have thought so as they are not actual invoices/credits for services.
if its purely exchange differences, I wouldnt touch VAT
Exempt
The trade in foreign exchange is a business activity, but it is exempt for VAT. HMRC Brief 5/07 provides more details.
By all means post the profits to a relevant nominal code, but you may need to apply Partial Exemption rules, if the Client is VAT-registered.
I don't think he said
that he was trading in fc, just that he bought and sold IN fc! There is no VAT to be accounted for as there is no (further) supply.
Funny coz at first i thought the same as Les, that the client was trading in currency......
Then re-read it and agree with Richard, not trading in currency, just buying and selling in foreign currency!
Think between us we have got there! :)
VAT reports affected by adjustments via invoicing
Just as Richard said, VAT is accounted on sale. FX differences resulting on settlement are neither inputs not outputs. More over I wouldn’t be adjusting via invoices as this would distort VAT reports accounting for FX adjustments.
The best way is to write balances off (care should be exercised however if cash accounting for VAT is used). Journal entry is the best way forward, or pay balances to FX account, depending on software used.
Can we claim bad debt relief then
The majority of the differences are on the sales ledger and show that balances are still due when in fact they have been settled just underpaid due to the exchange rate.
Instead of writing them off to exchange rate differences, is it possible to write them off to bad debts (as they are monies that will never be received) and claim bad debt relief.
No!
This post appears to show a lack mof understanding of the nature of these transactions. if I invoice you $1,000 and you pay me $1,000 there is no VAT implication, no bad debt. My invoice is settled in full.
Even if this is 1,000 euros and it was worth £800 when I invoiced you and when you pay me it's only worth a tenner - and I would not be that surprised! - there is still no bad debt. if you did not want payment in euros you should not have entered into a contract in euros.
Agreed (with Mr Mischief)
I initially wondered whether this question was a wind up!
Perhaps the OP might wish to invest in VT (or any other accounting package which offers both multi-currency accounting and a VAT return facility). It might be then instructive for him to see the various entries causing/resulting in currency gains/losses.