Selling internationally can create a taxable profit or an allowable loss even when the product price never changes. The difference arises because a foreign currency sale may have one sterling value when it is recorded and another when the customer or marketplace pays.
For most UK ecommerce companies using accrual accounting, foreign currency receivables and balances must also be checked at the year end. This means an exchange movement may affect taxable profit before the currency is converted into sterling.
What creates an exchange difference?
An exchange difference normally arises when a business:
- Raises an invoice in euros, dollars or another currency
- Receives a marketplace payout after the original sale date
- Keeps funds in a foreign currency bank or payment account
- Pays overseas suppliers after recognising the purchase
- Uses a currency contract to manage exchange risk
A gain occurs when the sterling value received or carried is higher than the amount previously recorded. A loss occurs when it is lower. Payment processor charges, marketplace commissions and conversion fees should normally be identified separately from the currency movement.
How the accounting works
Under FRS 102, a foreign currency transaction is initially translated using the spot rate on the transaction date. A reasonable average rate may be used when it closely approximates actual rates and exchange rates have not fluctuated significantly.
| Stage | Usual accounting treatment |
|---|---|
| Sale date | Record revenue and the customer balance in sterling using the transaction date rate or a suitable approximation |
| Financial year end | Retranslate unpaid monetary balances using the closing rate |
| Settlement date | Compare the sterling value received with the receivable carrying value |
| Foreign currency account | Retranslate the monetary balance at the closing rate |
| Inventory or fixed asset held at cost | Keep the transaction date sterling cost rather than retranslating it each year |
Receivables, payables and foreign currency cash are monetary items. Exchange differences from settlement or year end retranslation are generally recognised in profit or loss. Non monetary assets held at cost are generally not retranslated after initial recognition.
Exchange gain calculation
Assume a UK company invoices a customer for €10,000 when £1 buys the equivalent of €1.19, expressed here as £0.84 for each euro.
| Event | Calculation | Sterling value |
|---|---|---|
| Invoice recorded | €10,000 × £0.84 | £8,400 |
| Year end retranslation | €10,000 × £0.85 | £8,500 |
| Unrealised gain at year end | £8,500 less £8,400 | £100 |
| Customer pays later | €10,000 × £0.86 | £8,600 |
| Further realised gain | £8,600 less £8,500 | £100 |
The total exchange gain is £200. Under accrual accounting, £100 is normally recognised in the first accounting period and £100 in the next. If the payment value had fallen to £8,100 without an intervening year end, the business would instead record a £300 exchange loss.
How companies are taxed
For UK companies, exchange gains and losses on monetary assets and liabilities normally fall within the loan relationship rules. In most routine cases, the Corporation Tax treatment follows the amounts recognised under generally accepted accounting practice, so no separate tax adjustment is required.
A trading exchange gain generally increases taxable profit, while a trading loss generally reduces it. A non-trading balance may be treated as a non-trading loan relationship item instead. Special rules can apply to hedging, connected parties, amounts recorded in reserves, foreign operations and balances held for an unallowable purpose.
For the 2026 financial year, the small profits Corporation Tax rate is 19% for profits up to £50,000, the main rate is 25% above £250,000 and marginal relief applies between those limits. The thresholds can be reduced for short accounting periods and associated companies.
Sole traders and partnerships
For an unincorporated business using traditional accounting, realised and unrealised exchange differences on trading monetary items are generally included in taxable profit. A gain must be connected with the trade, while a loss must be on revenue account and incurred wholly and exclusively for the trade.
Cash basis is the default method for many sole traders from the 2024 to 2025 tax year. It records income when received and expenses when paid, so unpaid customer invoices are not normally retranslated for tax under that method. The business should use a consistent approach to deciding when money is received or paid.
Foreign currency held for investment or speculation may not have the same trading treatment. The purpose of the account, how it is used and the source of the funds all matter.
VAT is a separate calculation
Foreign currency sales and purchases must be converted into sterling for UK VAT records. Where UK VAT is due, a foreign currency invoice must also show the relevant net totals and VAT amounts in sterling.
A business may normally use the UK market selling rate at the time of supply or HMRC’s published period rate. A different method requires HMRC approval, and the chosen treatment must be applied consistently.
A later exchange gain or loss does not normally change the sterling VAT already declared for the supply. Even under VAT cash accounting, HMRC says the sterling VAT shown on the invoice remains the amount declared when full payment is received.18
Marketplace and payment accounts
Do not treat the net bank deposit from Amazon, eBay, Shopify Payments or another provider as sales without reconciling it. Where the seller is acting as principal, records should usually separate gross customer sales, VAT, refunds, commissions, fulfilment charges, payment fees, withheld reserves and exchange movements.
HMRC notes that platform reports may show earnings after fees, commission or taxes and do not replace normal business records. For an agent arrangement, VAT valuation can also be based on the gross customer charge even where the seller receives a net amount after commission.
Maintain a clear audit trail containing transaction dates, original currency amounts, rates used, rate sources, marketplace statements, invoices, bank statements and conversion charges. Company tax records generally need to be retained for six years after the relevant financial year, while VAT records are generally kept for at least six years.
Practical year end checklist
- Reconcile each marketplace statement to gross sales and refunds
- Match each foreign currency receivable and payable to the ledger
- Retranslate open monetary balances using the closing rate
- Revalue foreign currency bank and payment accounts
- Post exchange gains and losses to separate nominal codes
- Separate marketplace fees and conversion charges from exchange movements
- Review whether each balance is trading, non trading or capital
- Check that VAT conversion follows the selected permitted method
- Review forward contracts and other hedges with an accountant
- Save the exchange rate source and calculation with the working papers
How UK ecommerce accountants help
UK Ecommerce Accountants can turn complex marketplace and currency data into reliable sterling accounts.
The service also aligns bookkeeping, VAT and direct tax treatment so the same payout is not recorded incorrectly.
- Reconcile gross sales, refunds, fees, reserves and net payouts
- Set up multicurrency bookkeeping for marketplace and payment accounts
- Calculate realised and unrealised exchange differences
- Apply consistent rates for accounts and permitted rates for VAT
- Review the Corporation Tax or Income Tax treatmen
