If you run a British business that’s looking to expand its trade network overseas, one of the first questions you ask should be: “How does this affect my VAT liabilities?”
If you’re already trading overseas and you currently don’t pay VAT, you may be risking non-compliance, penalties and even legal action.
We thought it was important to guide you through when, why, where, and how your business needs to pay VAT when trading internationally, so you’re fully aware of your potential obligations.
There are ways to mitigate VAT, by the way, but it’s best to discuss this with your international tax adviser.
When do you need to pay VAT?
VAT is generally payable on most goods and services that are bought and sold for use or consumption.
When trading internationally, your VAT requirements may differ depending on whether you’re trading in the EU or further afield.
If you’re selling goods to customers in the EU, you need to consider whether your customer is VAT registered.
If they are, you can usually zero-rate the sale, meaning you do not charge VAT.
However, the customer will account for the VAT in their own country under the reverse charge mechanism.
If your customer is not VAT registered, you must charge VAT at the applicable UK rate.
For goods exported outside the EU, on the other hand, sales are generally zero-rated for VAT, meaning you do not charge VAT to the customer.
However, you must keep evidence of the export to support the zero-rating.
For services, whether you charge VAT depends on the nature of the service and where the customer belongs.
Speak to your adviser for help in determining your service’s VAT liabilities.
Why do you need to pay VAT?
VAT is a significant source of revenue for governments and helps to level the playing field by ensuring that goods and services are taxed fairly, regardless of their origin.
From a more direct perspective, paying your VAT correctly is essential for several reasons:
- Compliance: Avoiding penalties and interest for incorrect VAT treatment.
- Reputation: Maintaining your business’s credibility and good standing with tax authorities.
- Financial planning: Accurately accounting for VAT can prevent unexpected liabilities and aid in financial forecasting.
With that being said, it’s clear to see the importance of proper VAT management in your continued business operations.
Where do you need to pay VAT?
The location where you need to pay VAT is determined by the destination of the goods or services you sell:
- Goods within the EU: If your customer is VAT registered, they will handle the VAT. If not, you will charge VAT at the UK rate.
- Goods outside the EU: You can zero-rate these exports, but you need to keep thorough documentation.
- Services: The VAT rules for services can be more complex, often depending on the type of service and where the customer is based. Generally, services supplied to businesses outside the UK are outside the scope of UK VAT, while those supplied to consumers might still be subject to UK VAT.
Knowing where VAT applies ensures you can accurately charge and account for VAT in your international transactions and maintain compliance with the relevant regulatory body.
This is HM Revenue & Customs (HMRC) in the UK.
How do you pay VAT?
To ensure you are paying VAT correctly, we recommend you follow these steps:
- Register for VAT: Ensure your business is VAT registered in the UK. If you are trading above the VAT threshold (£90,000), this is mandatory.
- Check customer VAT status: Determine whether your customer is VAT registered and where they are located.
- Issue proper invoices: Provide VAT invoices where applicable, showing the correct VAT rate and amount.
- Maintain records: Keep detailed records of all transactions, including proof of export for zero-rated goods.
- Submit VAT returns: Regularly file your VAT returns with HMRC, including details of your international sales and any VAT paid or reclaimed.
By following these steps, you can manage your VAT liabilities effectively and stay compliant with regulations, but we highly recommend you speak to an adviser on the subject.
If you have any doubts or need further advice, speak to one of our international tax advisers.
We’ll be able to tailor the guidance we give to your specific business needs and help you find avenues for VAT mitigation.
We can also provide strategic advice on the other taxation elements of your international expansion.
