Why it’s important to understand HMRC spot rates for tax

Before we break down the importance of why it’s super important to understand HMRC spot rates for tax, we can only imagine that you must be wondering ‘what on earth are HMRC spot rates?’ 

A spot rate is the real-time price at which you can exchange one currency for another. The key word is real-time as spot rates change literally every second. 

English, please?

We know it’s a lot to take in at once! So as always, we’ve broken it down to make it as simple as possible so that you won’t pull a brain muscle trying to wade through jargon:

What’s an example of spot rates?

We knew you’d ask! Here’s an example of how a spot rate works:

✈️ Janie is going to Turkey for a holiday soon. The national currency in Turkey is the Turkish Lira, so Janie needs to buy some so that she can buy souvenirs whilst abroad – so she takes a trip to her local bureau de change.

💱 When Janie gets there, she buys £200 worth of Turkish Lira which gives her 4,184.87 to spend – this is the spot rate. 

🏖️ She has a blast whilst on holiday and decides to book the same holiday for the next year, however, her £200 only buys her 3,571.78 Turkish Lira the next time around – this is because the spot rate has changed.

Where does HMRC come into all of this?

When HMRC is mentioned, it’s usually for one reason – you guessed it, tax! For any business that has foreign earnings, it is a good idea to get familiar with the HMRC spot rates for the sake of tax, here’s why: 

• When filing your tax return, all earnings must be translated to GBP
• Spot rates can have a huge impact on the amount of tax you pay 
• If you aren’t careful, spot rates can ultimately sink your business

What spot rate do I use for tax returns?

Many people opt to use conversion calculators to convert currencies, HMRC also makes converting foreign earnings a little easier by publishing extensive lists of:

• Monthly rates that date all the way to 2012
• Yearly averages and spot rates that date back to 2016

Our personal advice is none other than to seek advice if you’re looking to understand this further!

What’s the difference between spot rates and forward rates?

Now you know what spot rates are, you may be wondering ‘how are forward rates any different?’ 

There’s one key difference between spot rates and forward rates – the time. We know that spot rates are dependent on real-time, but forward rates are actually based on the future. 

Here’s a quick example:

Too much to take in?

We get it, it can be really confusing – but on the bright side, our accredited accountants provide expert advice on all things tax! Get in touch if you want to book a consultation.