VAT is a tax that is applied in all EU countries. However, each EU country has different rules and regulations governing how it collects VAT. Some non-EU countries have VAT rules which differ from EU VAT rules.If you’re planning to trade internationally, you’ll need to familiarise yourself with the laws of each country you trade with. Most businesses seek professional advice at this stage. However, to get started, here’s an overview of some of the fundamental international EU VAT principles.
Due to the result of the Brexit referendum, it will be necessary to monitor any changes to the UK and EU VAT position when further details on the terms of the UK's exit from the EU are known. In the meantime, our advisors will be able to discuss the possible implications on your business with you.
Trading within the EU
When you begin buying and selling goods within the EU, there are a few administrative requirements to stay tax compliant. These include:
- EC sales list – This is a document you need to submit to HMRC with the VAT return which outlines sales to businesses in other EU member states.
- Intrastat – When the value of dispatches and acquisitions of goods to and from the EU member states breaches certain thresholds, you need to submit an intrastat form monthly. This details the movement of your goods around the EU.
Dispatching goods to an EU member state
If you sell goods to a customer in another EU member state, you are dispatching them.
If the customer is not VAT registered, then UK VAT will be charged just like other sales. This is known as a distance sale; each EU country has a VAT registration threshold for distance sales. If you breach this distance selling threshold to another EU country, you’d normally have to register for VAT there too and start charging local VAT rather than UK VAT.
If the customer is VAT registered in the country you are selling to and you receive their foreign VAT registration number, then you can zero rate (i.e. not charge VAT on) your sale to them. They will then account for VAT themselves under their country’s acquisition tax mechanism (see ‘Acquiring goods from an EU member state’ below).
To apply the zero rate, it is important that appropriate transport documentation is kept to evidence the removal of the goods from the UK to the customer’s site.
Acquiring goods from an EU member state
Here, goods are bought by you (a UK business) from a supplier in another EU country.
Just like a dispatch, you will be charged VAT by the foreign supplier if you are not VAT registered in the UK.
However, if you are VAT registered in the UK and can provide the supplier with your UK VAT registration number they won’t charge you VAT. You then account for this yourself under the acquisition tax mechanism.
The acquisition tax mechanism is a simplification in VAT accounting across the EU, used when goods are sold to a customer who is VAT registered in another EU member state.
If you need to purchase goods from an EU supplier, the supplier can zero rate their supply (i.e. charge no VAT) and you must account for the VAT yourself. It will be charged at the UK VAT rate at the time when the goods entered the UK. You show this on your VAT return by charging yourself the required VAT and, at the same time, recovering this VAT from HMRC.
If you are a fully taxable business who can recover all your VAT then this is merely a paper exercise and it has no effect on how much VAT you owe or receive from HMRC.
Exporting goods to a non-EU member state
If you sell goods to a customer outside the EU, and can prove it through commercial evidence such as bills of lading, then VAT is not normally charged on the sale.
Importing goods from a non-EU member state
When you buy goods from a supplier outside the EU, no VAT will be charged on this transaction by your supplier. Instead, import VAT will have to be paid before the goods will be released from customs.
The amount of VAT is calculated as if the goods were supplied in the UK. So goods which are standard rated will require 20% VAT to be paid. The imported goods may also be subject to Customs Duty depending on the type of good imported.
Selling services outside the UK
When providing services, VAT is accounted for in the country where the place of supply is.
If you’re providing general rule services and your customer is VAT registered, the place of supply is the EU country where your customer is established. In order to avoid far too many VAT registrations, a reverse charge mechanism exists which shifts the obligation to account for this VAT to the customer. This means that no VAT is charged on the sale by the supplier (see below).
The reverse charge mechanism is a simplification for EU businesses to account for VAT on the services they buy and sell. It is very similar in its application to acquisition tax but applies to all services purchased from businesses outside the UK, rather than goods.
Let’s say a business in Spain provides services to a company established in the UK. In this case the place of supply is in the UK and UK VAT needs to be accounted for.
The reverse charge mechanism avoids the Spanish business having to register for VAT in the UK, as the Spanish business can zero rate their sale to the UK business. This shifts the obligation to account for UK VAT on to the UK business.
The UK company accounts for UK VAT by charging themselves the appropriate amount of VAT whilst recovering this VAT on the same return (assuming they are a fully taxable business).
If you’re providing general rule services and your customer isn’t VAT registered, the place of supply is where you, the supplier, are based. Therefore UK VAT is applicable
Buying services from outside the UK
If a UK VAT registered business provides an EU VAT registered business with its UK VAT registration number then they will not be charged VAT. Also, if the supplier of the services is based outside the EU then it is unlikely that any tax will be charged.
In order to account for VAT on these types of purchases, the reverse charge mechanism applies.