When receiving money from abroad, it may seem like the best way to avoid various bank fees and conversion costs is to invoice in pounds. However, this may not always be the case. You may get a better rate by making the conversion yourself, and receiving payment in foreign currency will give you more control over the exchange rate used, while still avoiding conversion costs. Here we look at this issue in the context of UK farming and how to best receive funds under the Basic Payment Scheme (BPS), the process through which UK farmers receive support under the EU ‘s Common Agricultural Policy.
As farmers begin their BPS applications over the coming months, one key consideration is whether to be paid in pounds or euros. At the moment, the pound is the weakest it has been against the euro in many years following the June Brexit vote. This has made buying machinery and inputs from Europe much more expensive, but will increase the sterling value of any receipts in euros.
Compare euros to pounds.
Fluctuating exchange rates could seriously impact on the final amount received
While BPS payments will be made between December and June of a year, the exchange rate used to convert euros into pounds will be the average of the European Central Bank rates set during September. A lot could happen to the exchange rate between now and then, adding an extra level of uncertainty when there is no way of knowing how much your allocation will be.
There are many factors which could influence the exchange rate over the next four months. If the eurozone economy consolidates its recovery and uncertainty rises about the UK’s membership of the EU, then the euro could weaken against the pound. This would mean than any allocation fixed in euros would be worth less in pounds once converted. But if troubles in the eurozone occur, given the risks surrounding Brexit uncertainly in other countries, for example,, then the euro could weaken further. This would mean that any sum received in pounds for a fixed amount in euros would be less. Or competing pressures could balance out, leaving the exchange rate broadly where it is today.
So what can you do to reduce this uncertainty?
At first glance it may appear simpler just to receive the payment in pounds, especially if you you don’t otherwise have much need for euros, if say, you do not buy directly from European suppliers, or have other receipts that might warrant having a euro bank account. At the very least, receiving directly in pounds would avoid having to pay bank fees to receive a payment in and convert it from a foreign currency, whatever the exchange rate may be at the time of calculation.
Receiving BPS in euros gives greater flexibility to manage risks
It is worth considering receiving payment in euros, however. Opting to receive in euros would give you much more control over how much you might receive in pounds. Of course, the exchange rate will still fluctuate between now and September, but receiving payment in euros opens up the possibility to fix the rate at which you can convert in to pounds in advance, using a forward contract. This will not only protect you from exchange rate fluctuations in the coming months, but also help you budget better any purchases that you might make in euros.
Forwards usually require a small deposit in advance that gets netted off with the final amount converted. But even if you don’t want to put aside a deposit for an as-yet unknown payment size, or if you are confident that the euro will strengthen by July receiving payment in euros still adds creates greater flexibility, especially if you can afford not to access the funds immediately. If this is the case, you could keep the sum in euros, and convert it back to pounds in stages as needed should the exchange rate continue to improve, for example. You could still protect yourself against losses if the exchange rates moves the wrong way. To protect against too great a fall in the euro after the payment is received, you could set up what is known as a limit order, whereby you set a minimum level at which which you would be happy to convert the money into pounds. Furthermore, by holding some money in euros already, you would avoid any conversion costs should you need to pay overseas suppliers in that currency.
This is all possible without even having to maintain a bank account in euros to receive the money into, let alone having to put up with bank fees just to receive a payment in and convert it from euros. The money can be received into a nominated bank account on your behalf by a specialist currency broker, for example, who will then convert it into pounds to deposit in your bank account. These brokers usually offer much better exchange rate than banks, and do not charge any fees in the process. Compare pounds to euros rates.
Don’t worry about not having a euro bank account yet or even finalising the details of an arrangement with a specialist currency provider to receive euro funds on your behalf. While you need to specify a currency by the BPS deadline, you have until December 1st to provide the Rural Payments Agency (England)/Rural Payments and Services (Scotland)/Rural Payments Wales/Department of Agriculture and Rural Development (NI) the details of the account you want to use.
For more information on receiving payments in foreign currency, see our foreign currency invoicing guide.
