UK businesses are dealing with more and more cross-border transactions, making VAT a tricky topic. In this article we’ll go over the rules around import and export VAT, and what they mean for your business. Jargon ahoy!
Is VAT different for imports and exports?
VAT is a consumption tax levied on goods and services. In the UK, businesses that are VAT-registered must charge VAT on their taxable sales, and most of us pay VAT on nearly all our purchases.
VAT becomes more complex when sales cross an international border though, because the rules are different depending on whether the sale is to a business or a person, involves goods or services, and where it moves to and from.
It wouldn’t be a very helpful article if we left it there, so we’ll go into everything in more detail.
VAT when you sell from the UK to abroad
The VAT rules for trading with EU countries changed a lot after Brexit, so sales to EU countries are now treated pretty much the same as sales to non-EU countries. Having said that, there are still a few things to know!
Sales to EU businesses
If you sell goods to a VAT-registered business in an EU country, the sale is usually zero-rated for VAT as long as you have the customer’s VAT number and can show evidence of the goods leaving the UK. Your customer will then account for VAT in their own country through the reverse charge mechanism (more on this in a minute).
Sales to EU consumers
When selling goods to non-business customers in the EU, VAT rules can vary depending both on the country your customer is in and the value of the goods.
Your options here are either to register for VAT in each EU country you sell to, or register for the One Stop Shop (OSS) scheme in one EU country which would then cover you across the EU.
Sales to non-EU countries
Goods sold to customers outside the EU are generally zero-rated for VAT, so VAT should not be charged on the sale. You still need to record the transaction correctly in your VAT accounts and keep evidence that the goods have been exported to explain why VAT wasn’t charged.
What is the VAT reverse charge mechanism?
The reverse charge mechanism is a process where the buyer, rather than the seller, accounts for the VAT on a transaction. It’s mostly used in cross-border transactions between VAT registered businesses in order to simplify VAT reporting and prevent tax being paid twice.
- The seller doesn’t charge VAT on the sale, but they will need to include a reference on their invoice which explains the reverse charge will apply. It’s good for the seller because they don’t need to register for VAT in the country they’re selling to.
- The buyer reports the VAT on their VAT return twice: once as an amount they have paid, and once as if they had charged it to a customer. These two entries cancel each other out on the same VAT return, making the transaction VAT-neutral for them. It’s good for the buyer because they don’t need to pay the VAT only to reclaim it later – which is always good news for cash flow!
How do I record VAT on cross-border sales of goods?
For businesses selling goods across borders, recording VAT correctly is essential for staying compliant and avoiding penalties. Both of which are extremely good reasons to keep reading, even though VAT and accounting software are rather… dry… subjects.
Here are a few steps to help you through the process.
Check whether you need to register for VAT
You’ll need to register for UK VAT if your taxable turnover reaches the UK VAT registration threshold. But be aware that VAT registration rules can vary from one country to the next. Always check what rules are in place for the country you’re selling to
Can you use postponed accounting for VAT?
Postponed accounting aims to help UK businesses deal with the impact of import VAT on their cash flow. It’s designed to be helpful, so it’s helpfully not mandatory unless you defer your customs declarations.
It means that a UK VAT registered business which imports goods worth more than £135 can account for import VAT on their VAT return, rather than having to pay it when their goods are waiting at the border.
You can use postponed VAT accounting as long as:
- You’re registered for VAT in the UK
- You import goods with a value higher than £135 to use in their business
- The customs declaration shows that you’ll be using postponed accounting, and includes your VAT registration number, and EORI number
Be clear on your customer’s VAT status
If you’re selling to another VAT-registered business and need to apply the reverse charge, make sure they’re actually VAT registered. You’ll need their VAT reference number. If you’re dealing with someone in the EU you can verify their registration status using the VAT Information Exchange System (VIES). You’ll need proof of their status for any export documents
Decide what VAT treatment to use
For each cross-border sale, decide whether the transaction is subject to reverse charge, zero-rated, or if VAT needs to be charged. This largely depends on the status of the customer, the destination of the goods, and whether you are using schemes like the OSS for EU sales.
Keep accurate records
We can’t stress this enough! Yes alright, we make accounting software so we’re a bit precious about record keeping even though it’s very boring, but it doesn’t half make things easier.
Accurate records could include shipping documents, transport records or commercial invoices. You’ll also need to maintain detailed records of all transactions, including customer VAT numbers, how much was charged, on what…
Use the right information on your invoices
When sending invoices for cross-border sales, make sure they include all the information they should. For zero-rated sales to EU businesses, this includes things like your customer’s VAT number and a statement that the reverse charge applies. For sales under the OSS scheme, your invoices should be based on the VAT rate of the country your customer is in.
Submit your VAT returns
Include your cross-border sales in your normal VAT returns. Report zero-rated sales in the relevant boxes, making sure you can back it up with the right documentation. If you are using the OSS scheme, you’ll need to submit a separate quarterly return for your EU sales.
What about VAT on services?
If you’ve waded through everything to get this far, you’ll be delighted to learn to that the rules around VAT on services can be even more complex than those for goods.
The general rule for charging VAT on services to another business is that you deal with it in the country where your customer is located. This means that if you supply services to a business customer in another country, you don’t generally charge UK VAT. Instead, the customer accounts for VAT using the reverse charge mechanism. Hurrah!
For services supplied directly to a consumer, the country from which the service is being supplied is usually where VAT is charged. Again, for most services provided to non-business customers, VAT is charged in the country where the supplier is located. However, there are exceptions, for example with digital services which we’ll look at now.
How should I treat digital services?
Recording VAT on cross-border sales for digital services involves identifying where your customers are located and applying the right VAT rate based on their country. For sales to consumers (not businesses) within the EU, you’ll need to charge VAT at the rate that applies in the customer’s country, which can be done through the One Stop Shop scheme. Keep detailed records of all transactions, including the customer’s location and the amount of VAT charged. This information can then be reported in your VAT return.
What about VAT on low-value goods?
UK businesses selling low value goods (generally under £135) to customers abroad need to record VAT differently depending on where the customer is.
For sales to the EU, VAT is charged at the rate of the customer’s country, and the business can use the Import One Stop Shop scheme. For countries outside the EU, VAT is usually zero-rated, but again, you must keep export records as evidence to support this.
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