Contractors' Questions: Does converting my pay into pounds incur VAT?

Contractor’s Question: I’m a UK resident working through an umbrella company. Normally I’m paid in Sterling, but I’ve just begun a new contract with a Danish firm paying in euros.

My umbrella has paid me considerably less Sterling than I was expecting and when I queried it, they said they had to charge VAT for the currency change from euros into pounds. 

This charge, on top of taxes, hit me with an effective tax rate of almost 50% even though I’m a basic rate taxpayer. Does this VAT charge on the exchange sound correct and how can I avoid this happening again?

Expert’s Answer: For contractors who are paid in a different currency to the one that they ultimately need, foreign exchange is a factor that has to be considered. Whether you choose to take control of this element yourself or relinquish it to your umbrella company/ recruiter/ staffing agency, fundamentally a transaction will take place and this will not always bear a uniform charge or rate. 

There are a key number of factors that determine what rate of exchange that your funds receive, notably:

• The bank you use
• Amount of funds you have in your accounts
• The ‘grade’ you are given within the client database
• The bank’s perceived value of your account
• Whether the bank uses a live rate, a rate of the day or a fixed rate

You may find it worth considering a specialist broker to manage this aspect as they are typically able to achieve the keenest rate. But foreign exchange is not subject to VAT and so it does not ring true that this would be a genuine reason for the differential on your salary payment.  It would feel to me that there has been a significant exchange rate loss on the exchange of your funds and this is being passed on to you. 

I would be inclined to potentially look at an umbrella that is a little more ‘open’ with their information; especially because some brollies now even work with specialist brokers as part of the packages they provide to those of their users paid in foreign currency.

The expert was David Thomas, head of private clients at Global Reach Partners.

Editor’s Note: Related Reading –

Contractors’ Questions: Can I get my fee from a US client in pounds?

Contractors’ Questions: How to know if euros or pounds are preferable?

Contractors’ Questions: How to turn local currency into more pounds?