UK: Buying And Selling Overseas: Don't Let VAT Be A Barrier

Last Updated: 9 July 2015
Article by Richard Wild

Many organisations now buy or sell overseas, even if they do not consider themselves to be international businesses. The VAT implications can be complex, so this top ten list of issues should help you identify the key points and ensure there are no unpleasant surprises.

Most businesses engage in some form of international trading, even if they don't know it. For example, buying computer software from the Republic of Ireland, paying eBay fees, or supplying the occasional European customer, can all have VAT consequences which are outside normal UK trading, and give rise to additional reporting and record keeping obligations.

Businesses which trade routinely with other countries will already be familiar with many of these, but every organisation that buys and sells overseas should ensure its systems are adequate to identify the correct VAT position, and the evidence required to support the treatment adopted.

Our top ten list of international VAT issues covers both sales and purchases; although some will affect both.

1. Goods or services?

The VAT treatment and reporting obligations for sales of goods is often different to that for supplies of services.

While in many cases the nature of the supply will be obvious, it is important to determine whether what you are buying or selling represents goods or services for VAT purposes. Typical areas of confusion include computer software, supply and installation contracts, and activities which involve a mixture of goods and services.

2. Business or private customer?

When determining the VAT treatment and reporting obligations for a transaction, it is essential to establish whether your customer is in business (a taxable person in VAT terms – B2B), or is buying in a private capacity (B2C). This is particularly important when dealing with customers in other EU member states, and you should ensure that you adequately identify and evidence the status of your customer.

The usual way of identifying your customer's business status is to obtain their VAT number. You can check the validity of VAT numbers on the European Commission's website at http://ec.europa.eu/taxation_customs/vies

If you do not have a customer's VAT number, but still believe they are a business, you should obtain alternative evidence to support B2B VAT treatment.

3. Where does the supply take place?

The decisions under 1 and 2 above will usually determine the VAT treatment to be applied under the basic rules. However, these rules are subject to a number of exceptions; for example:

  • Supplies of services relating to land are treated as taking place where the land is located, irrespective of the nature or location of your customer.
  • Sales of goods to EU private individuals, in excess of the distance selling thresholds, are subject to VAT where the customer is located, which may mean you have to register for VAT in another EU member state.
  • Sales of digital services – see 5 below.

You should familiarise yourself with the circumstances in which the exceptions apply, and the impact on the VAT treatment and reporting.

4. Evidence to support the removal of goods

Sales of goods to EU business customers, and to all non-EU customers, are normally zero-rated – provided the goods have left the UK.

You should make sure that you have adequate procedures in place to evidence that the goods have indeed left the UK, within the requisite time limits. This is particularly important if goods are sold 'ex-works', meaning you have little control over their movement once they have left your premises.

5. 1 January 2015 changes to 'digital services'

The change in treatment of EU supplies of B2C digital services (broadcasting, telecommunications and eservices) has been widely publicised, and its impact should not be underestimated.

VAT on such supplies now needs to be charged where the customer is located, not where you are based; so a French customer needs to be charged French VAT, and so on across the EU. Businesses need to decide whether to register for VAT locally in each customer's country, or register under MOSS (the Mini One Stop Shop) which allows the reporting of all EU output VAT in a single return to HMRC.

6. Self accounting for VAT on supplies from overseas

Businesses which acquire goods from other EU countries will normally have to self-account for UK VAT as an acquisition.

Businesses which acquire services from overseas also normally have to self account for UK VAT, under the reverse charge mechanism. However, it is a common misconception that the reverse charge only applies to supplies of services from the EU, when in fact it applies to services acquired from anywhere outside the UK. A reverse charge can even arise when the supplier is not VAT registered in its country of establishment.

The effect of an acquisition, or the reverse charge, is to ensure VAT is charged and collected in the UK, ie so UK customers can't avoid VAT by buying from overseas. If you are normally able to recover all the VAT you incur, then these entries should be VAT-neutral. However, businesses that normally suffer a restriction on VAT recovery need to be aware of this additional cost.

7. Goods imported from outside the EU

Import VAT is normally due on goods imported into the EU and is payable at the time of arrival. Provided the importer is VAT registered, this VAT is can be treated as normal input tax and recovered through a UK VAT return, with form C79 acting as the requisite supporting documentation.

Import duty may also need to be paid depending upon the country of origin and the product's classification under the customs tariff. Import duty is not recoverable, therefore, it is very important to ensure that goods are correctly declared to HMRC, as an incorrect classification or origin declaration can result in too much (or too little) duty being paid.

Various reliefs from VAT and duty are available, for instance, if the goods are to be re-exported from the UK, and you should ensure that such reliefs are sought in a timely fashion.

8. VAT incurred overseas

Any overseas VAT incurred cannot be reclaimed on a UK VAT return. VAT incurred in other EU countries can be recovered under the EU VAT refund scheme (subject to the VAT rules of the country concerned) and claims are made through an electronic refund portal. If your business incurs even modest levels of overseas VAT (for example, on accommodation and subsistence, exhibition costs etc), use of the portal should be considered.

9. Reporting obligations

Trading activity with overseas businesses often requires separate reporting to HMRC.

Supplies to EU business customers, where UK VAT has not been charged, must be reported on an EC sales list (ESL). This applies to both goods and services. HMRC can, and will, apply penalties for late or non-submission of ESLs.

Intrastat forms, which record the movement of goods between EU countries, may also need to be completed, depending on the value of sales (dispatches) or purchases (arrivals). The annual thresholds are currently £250,000 for dispatches and £1.5 million for arrivals. Again, there are penalties for late or nonsubmission of Intrastat declarations.

10. Should I become an authorised economic operator?

Authorised economic operator (AEO) is a kite-mark for supply chains. Issued by HMRC upon acceptance of a completed application, AEO approval confirms that an organisation's customs procedures and supply chain security meet internationally recognised standards.

Businesses should expect the preparation, application and approval process to obtain the AEO certification to take at least a year but, once finalised, AEO status brings many benefits for international traders.

Obtaining AEO status will make applying for customs simplifications easier and reduce the likelihood of cargo being delayed at customs. It will also reduce the impact of significant customs law changes being introduced in the EU in 2016 as AEO authorised traders will have already shown that their controls are sound. Furthermore, becoming an AEO is likely to reduce the cost of international trade as approved traders will be able to offer reduced or nil guarantees to HMRC.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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