Shopify sellers paid in dollars: the books stay in pounds

A UK Shopify store that lets customers pay in dollars or euros still reports to HMRC in pounds, and the exchange rate behind those pounds has to be one HMRC accepts. Shopify's own conversion, which comes with a fee, is a separate thing. For Shopify accounting, that means recording each foreign-currency sale at a recognised rate and treating the conversion fee as a cost of the business.

What Shopify does with the currency

When a customer pays in a currency other than your payout currency, Shopify's help centre says it applies an exchange rate and a conversion fee at the time the payment is captured. Refunds go back at the exchange rate on the day of the refund, with no conversion fee. The rate used for each order shows in the order's timeline. UK stores can also be paid out in some other currencies, into a bank account in that currency, for a further fee.

So the pounds that reach your bank are the customer's payment converted at Shopify's rate, less the conversion fee and Shopify's other charges. That figure is neither your sales nor the value HMRC wants on your VAT return.

VAT is worked out in sterling

HMRC's VAT guide, Notice 700, says at paragraph 7.6, which has the force of law, that amounts for VAT must always be expressed in sterling. You convert using the UK market selling rate at the time of the supply, for which rates published in national newspapers are acceptable evidence, or the period rate HMRC publishes for customs. Once you opt for HMRC's period rate you cannot change without first writing to HMRC for its agreement, and any other commercial rate needs an application to HMRC.

That applies to sales that carry no UK VAT as well. Goods posted to customers outside the UK are normally zero-rated exports, as long as you hold proof that they left within three months, under HMRC's export notice. Their value still goes in box 6 of the return, in pounds.

The accounts use the rate on the day

For a company reporting under the Financial Reporting Council's FRS 102, section 30 says a foreign-currency sale is recorded at the exchange rate on the date of the transaction. An average rate for a week or a month can stand in for it, unless rates have moved sharply. When the money is settled at a different rate, the difference is an exchange gain or loss in the profit and loss account.

In practice each foreign-currency sale becomes three lines in the books: the sale in pounds at a recognised rate, Shopify's fees as a cost, and any remaining gap between those and the pounds that actually arrived, as an exchange gain or loss.

A month of dollar sales

Illustration, not a real client. A ceramics company in Bermondsey, registered for VAT and reporting under FRS 102, sells $12,000 of mugs and bowls to customers in the United States in November. It posts the orders itself and keeps the courier records that show each parcel left the UK.

• At the rates it has chosen to use, the $12,000 comes to £9,000. That is its sales figure, and the zero-rated value in box 6 of its VAT return.

• Shopify's payouts for those orders, after its conversion and transaction fees, come to £8,610.

• Shopify's records show £330 of fees on the orders, so the remaining £60 is an exchange difference between Shopify's rates and the company's own, a small loss.

Had the company simply recorded the £8,610 as its sales, turnover would be £390 too low, the fees would be missing from its costs, and box 6 would be understated on the return. Refunds add a further wrinkle, because they go back at the rate on the day of the refund, so a sale and its refund rarely cancel out exactly in pounds.

Set it up before Black Friday

• Choose your VAT rate method, the market rate or HMRC's period rate, and record the choice and the date you made it.

• Record foreign-currency sales at that rate, with Shopify's conversion and transaction fees in a cost account of their own.

• Keep proof of export for every overseas parcel, within the three months.

• Check each month that what reached the bank equals sales, less fees, plus or minus the exchange difference.

Our page on accounts and VAT for online sellers sets out how payouts, fees, refunds and currency conversion each get their own line in the books. Black Friday falls on 27 November this year, so the rate method is worth settling before that weekend's dollar orders arrive.

About the author

Harvey Dhillon is Founder and CEO of Zmartly, a UK accountancy firm for ecommerce sellers. He grew up in West London and began his career in investment banking finance at Barclays, before going full-time on Zmartly in 2020. He is a Chartered Management Accountant (ACMA, CGMA).

Featured photo by John McArthur on Unsplash.