Many small businesses now buy and sell goods and services from overseas. If you sell online, for example, then you’ll almost certainly have customers outside the UK. So what does this mean if you’re registered for VAT in the UK? And are there special rules involved?
Emily Coltman ACA, Chief Accountant to FreeAgent – which provides an online accounting system for small businesses and freelancers – explains the effect of VAT on overseas transactions.
Buying goods from within the EU (excluding the UK)
If you buy goods from another EU country, then your business will pay UK VAT at the time the goods came into the UK at the same rate of UK VAT as you would have paid if you’d bought the goods from a UK supplier in £ sterling.
The VAT you would have paid is called acquisition tax and it goes into box 2 of your VAT return.
Unless this is VAT that you wouldn’t be able to reclaim under UK rules – such as the VAT on a gift that you buy for a customer – you would then also put the acquisition tax into box 4 of your VAT return, so you don’t actually pay anything extra to HMRC.
Your supplier’s bill may well have 0% VAT on it, but this is for their own country’s VAT. You still need to work out acquisition tax.
So if you receive a bill from your supplier for £480, this is treated as the amount excluding VAT. You would multiply this amount by 20%, the UK’s standard rate of VAT, to get the notional amount of UK VAT, which is £96.
So you’d put £96 into box 2 and also box 4 of your VAT return. You’d also put £480 into boxes 7 and 9.
Buying goods from outside the EU
If you buy goods from outside the EU, then you would pay UK VAT at the time the goods came into the UK, at the same rate as if the goods had been supplied in the UK. This is called import VAT and your supplier will give you a certificate to show you’ve paid it.
You can then reclaim this on your VAT return – so effectively it’s just like paying a VAT-registered supplier in the UK.
The cost of the goods excluding import VAT goes into box 7 of your VAT return, but not box 9 because this is for goods bought within the EU only.
Selling goods in the EU (but outside the UK)
If you’re selling goods to customers in the wider EU who are also registered for VAT in their own country – and you have evidence that they are registered – then provided the goods actually leave the UK and you have evidence of this too, you can zero-rate this supply in the UK.
You need to put these sales into boxes 6 and 8 of your VAT return, and fill them in on your EC Sales List.
If you’re selling goods to customers who aren’t registered for VAT, then you have to charge UK VAT on the sale as if the customer were based in the UK. These sales are called distance sales.
You could also find that you have to register for local VAT where your customer is based, if you make enough distance sales there. The limits for distance sales are different for each country in the EU.
Selling goods outside the EU
If you sell goods to customers outside the EU then these sales can be zero-rated for UK VAT, provided the goods actually leave the UK within 3 months of the sale and there is proof that they did so.
The sale value of these goods goes into box 6 of your VAT return but not box 8, because box 8 is just for goods sold into the EU.
Buying services from outside the UK
If your business belongs in the UK, any services that you buy from outside the UK are treated as supplied here under the place of supply rule.
That means that you need to account for the VAT using the reverse charge calculation.
So if you buy a service from overseas (such as web hosting from an American provider like GoDaddy), you need to take the amount you paid to that supplier, translate it into £ sterling, then multiply that by 20% to get the VAT amount you would have paid had the service been bought from a UK supplier.
Put that figure into box 1 of your VAT return along with your output VAT.
But you also put it into box 4 of your VAT return with the input VAT, so that means that the extra amount of VAT you pay is £nil.
You would also need to put the full value of the supply, which is the original amount you paid in £ sterling, into boxes 6 and 7 of your VAT return.
Selling services to customers overseas
Because of the place of supply rule, if you sell services to customers who are in business outside the UK, they have to account for VAT, so for you these sales count as outside the scope of VAT and don’t go on your VAT return at all.
If you sell services to non-business customers outside the UK then you must charge UK VAT on these sales in the normal way and enter them on your VAT return as for UK sales.
More and more businesses are buying and selling goods and services overseas, so it’s important to make sure you stay in line with the rules not only in the UK but also in the countries where you sell.
*Emily Coltman ACA is Chief Accountant to FreeAgent, who provides an online accounting system designed to meet the needs of small businesses and freelancers. Try it for free at www.freeagent.com