Which conversion rate should I apply to pay UK Income Tax

[skray]

Hi,
I pay tax in the UK on my worldwide income on arising basis. The overseas foreign currency income that is giving rise to my tax liability in the UK is currently very week (bank rate), but according to the HMRC website - the average exchange rate for the year 2014/14 is higher (in favour of the foreign currency), the reason apparently being the foreign currency was stronger earlier in the financial year, but dropped significantly in the latter part of the year.

I did not convert any foreign currency into Pounds earlier in the year when the exchange rate was favourable.

If I calculate my tax liability as per average exchange rate, the amount that I have to pay for tax will be much higher that what I will receive if I actually convert the foreign currency into Pounds now, so the difference I will have to pay out of my local income in Pounds.

I would like to know if there is a way out e.g. if I calculate my tax liability at spot rate, or the exchange rate that was actually applied at the time of conversion rather than the average exchange rate - will HMRC accept it?

Thanks

[bd6759]

The correct method is to use the spot rate on the day the income arose, whether or not you actually converted it to sterling at that time. The date you convert money is irrelevant for income tax purposes. HMRC will usually accept the average rate unless it gives a wholly distorted figure where there have been significant fluctuations.

Converting money from a foreign currency into sterling is dealt with under the capital gains tax rules. Fluctuations to the exchange rate can give rise a chargeable gain or allowable loss.