American dollars, Australian dollars, Canadian dollars, Euro, Yen, Krona, Rand, Rupee, Baht, Peso…. (even sterling, if you didn’t know that it’s UK £, one of the world’s main trading currencies).
- What are foreign currency payments?
- How do you record foreign currency payments in Paypal?
- What about currency conversion & fees?
- How do you record foreign currency payments on your tax return?
It’s not difficult to receive money in foreign currencies and enter it into your tax return.
I’m going to show you how.
What Are Foreign Currency Payments?
Foreign currency payments is money received by your business that is not in the currency of your bank account and the country your business is registered in.
For the UK, that means money received in a different currency to UK £, also called sterling.
It’s really common to receive foreign currency payments. Almost every one of my clients has received foreign currency payments, and some of them, most of their business income (turnover) is in a foreign currency.
It’s the way of the business in our digital corner of the universe.
Why businesses receive foreign currency payments:
- You charge in £ and only occasionally receive a foreign currency payment (that’s me)
- You charge in £ for UK clients and in a foreign currency for digital products and non UK clients
- You have clients who will only pay you in their currency
- You charge in a foreign currency (e.g. USD) for everyone as it’s better for sales
My clients do all of these so rest assured, if you’re new to this, you’re in good hands.
Foreign currency payments are a normal part of business.
How Do You Record Foreign Currency Payments In Paypal?
I’m going to focus on foreign currency payments in Paypal as that’s the most common way of receiving them for us the-internet-is-our-life-after-cake-and-kids types.
There are 3 ways to handle foreign currency payments in Paypal:
(Remember foreign currency is any money received that is not the currency of the country your bank account and business is registered in)
- Convert each foreign currency payment to £ as you receive it
- Keep a foreign currency balance in Paypal
- Select a foreign currency as the default currency in your Paypal account
My recommendation is to convert each foreign currency payment to £ as you receive it, unless you receive regular long standing foreign currency payments.
It’s much less paperwork hassle.
Paypal will ask you whether you want to convert a foreign currency payment when it’s received, so you just need to click that action if it’s what you want to do.
Situations when you may want to keep a foreign currency balance in Paypal:
- You’re working while travelling and you need to keep a balance in the currency of the country you’re in
- You have long standing clients who want to pay in a foreign currency so it’s worth keeping a foreign currency balance
For both of these situations, you need to keep track of the currency conversions and be consistent doing it. You can’t forget about it for a few months. The consistency and the need for the extra time and energy on paperwork is why my personal preference would still be to convert each payment when receiving it.
Situations when you may want to select a foreign currency as the default currency in your Paypal account:
- You charge only in a foreign currency (e.g. USD)
A lot of people will only buy if they’re being charged in a currency they understand, even if you provide a currency converter.
It’s common for digitally based businesses with mostly global-non European or North American customers to have all their prices in USD.
In that situation, selecting USD (for example) as the default currency for your Paypal account may be your best option.
Again, you need to keep track of currency conversions and pay attention to how you’re going to transfer the money into your bank account.
You need to be on top of your paperwork to do this and understand your business financials.
What About Currency Conversion?
Paypal will convert your foreign currency payment within Paypal if you choose for the payment to be converted into your default currency.
Paypal use their own own currency conversion rate, which may not be the industry standard.
It’s one of my bugbears about Paypal. On the other hand, it’s the most trusted payment method of payment and higher sales are more important. (Read more about Paypal fees and what to do with Paypal transactions).
If you carry a foreign currency balance on Paypal or have your Paypal account in a foreign currency you need to do your homework about currency conversions and how you’re going to handle them to be consistent (ask your accountant).
Most fees and charges associated with currency conversion and receiving foreign currency payments are tax-deductible expenses. You need to keep careful track though, especially if you’re using a personal bank account for business.
How Do You Record Foreign Currency Payments On Your Tax Return?
When you convert foreign currency payments in Paypal on a transaction-by-transaction basis, it’s simple recording them for your tax return.
The foreign currency will be converted into £ into your Paypal.
You then transfer the money into your bank account at your own convenience (remember to keep track of the transactions). There is no need to rush to move the money once it’s converted.
The foreign currency payment isn’t ‘foreign income’ on your self assessment tax return as it’s money into your business.
It’s no different to other income, other than the currency conversion.
I hope my guide to recording foreign currency payments in Paypal has helped you feel more confident, informed and empowered to understanding how you receive income in a foreign currency and what to do with the payments for your tax return.
How do you record your foreign currency payments in Paypal?
If you need support with foreign currency payments in Paypal, get in touch.
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If you need an at-your-own-pace tax return course that’s easy to understand, have a look at How To Do Your Own Tax Return.
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