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A very short guide to: International VAT

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

Goods

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.

Services

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.

Making Tax Digital for VAT – can I just record the daily gross takings?

Making Tax Digital for VAT – can I just record the daily gross takings?

For many businesses, Making Tax Digital changes how transactions must be recorded in their accounting records. Not only does it require the relevant information to be captured digitally, the rules specify precisely what information needs to be recorded in relation to each supply. This may require a change in the method or nature (or both) of these businesses’ record-keeping.


At Cloud Accounting LLP, we have seen numerous queries around how to keep records which are compliant with MTD, but a question which comes up repeatedly is how MTD affects businesses who supply final consumers, but who do not consider themselves ‘retailers’. Examples could include restaurants and cafes, car wash businesses, and even a different revenue stream within a non-retail business such as a bar or a gift shop within a B&B or hotel. I will refer to them as ‘cash businesses’ in the remainder of this article.

Summary

Retailers and other cash businesses (those who sell to an end consumer) do not need to capture the details of each individual supply they make in their digital records, but they do need to record the total of all retail supplies for each day of trading – it cannot be done on a less frequent (eg weekly) basis.

This can be done on a simple Monday – Friday spreadsheet. In certain circumstances it may be necessary to split gross takings between those supplies that are zero rated and standard rated.

Read on if you want to understand the detailed legislation behind it:


Record keeping requirements

Let’s first look at the basic requirements and consider why cash businesses may find these difficult to comply with.
The Value Added Tax (Amendment) Regulations (2018 No. 261) state that the following information must be captured within the digital records:
(3) Subject to paragraph (4) the information specified for the purposes of paragraph (1) for each accounting period is—
(a) subject to sub-paragraph (c), for each supply made within the period—
(i) the time of supply,
(ii) the value of the supply, and
(a) subject to sub-paragraph (c), for each supply made within the period—
(i) the time of supply,
(ii) the value of the supply, and
(iii) the rate of VAT charged;
Paragraph (c) provides some relaxation from these rules:
(c) where more than one supply is recorded on a tax invoice and those supplies are either—
(i) supplies made which are required to be accounted for in respect of the same prescribed accounting period and are subject to the same rate of VAT, or they may be treated as a single supply for the purposes of … sub-paragraph (a)…
These rules are repeated in paragraph 4.3.2 of the VAT Notice (700/22).


Most readers will be aware that the word ‘supply’ in VAT has a particular meaning, and is much more granular than the amounts recorded on an invoice or statement, or amounts paid or received. So, businesses who make lots of individual supplies, particularly to end customers for whom they are not required to supply a VAT invoice, would have difficulties complying with the above record-keeping requirements of MTD.


Relaxation for retailers

Fortunately, all is not lost. Provision has been made in the Regulations to relax the above requirements in particular circumstances:
(4) The information specified in paragraph (3) may be varied by direction of the Commissioners to make provision about—

(c) the operation of retail schemes under Part 9 of these Regulations (supplies by
retailers);
Paragraph 4.5 of the VAT Notice provides that relaxation in a paragraph which has the force of law:
In addition to the records listed in paragraph 4.3 above, if you account for VAT using a retail scheme you must keep a digital record of your Daily Gross Takings (DGT). You are not required to keep a separate record of the supplies that make up your DGT within functional compatible software.
For more information on retail schemes and Daily Gross Takings see VAT notice 727: retail schemes.


So, retailers do not need to capture the details of each individual supply they make in their digital records, but they do need to record the total of all retail supplies for each day of trading – it cannot be done on a less frequent (eg weekly) basis.
But the question remains – does this relaxation include ‘non-traditional’ retailers ie the cash businesses described above?


What is a retailer?

There is no definition of ‘retail’ or ‘retailer’ in the VAT Act or the VAT Regulations. HMRC provide a definition in the retail scheme VAT Notice (727) as follows:
Retail is the selling of goods or services to consumers [and the retail schemes are aimed at retailers that cannot account for VAT using normal accounting].


Accounting for VAT in the normal way does not require businesses to issue a tax invoice to unregistered customers, but it does require them to identify, for each sale, the tax exclusive value and the VAT, and to be able to produce periodic totals of those amounts. Many cash businesses will not be able to do this, because of the level of information they retain in relation to each sale they make – even if they use electronic tills.


Therefore, in accordance with the definition above, and as HMRC has also kindly confirmed to us, cash businesses are considered to be retailers for these purposes. Cash businesses are likely to be covered by the point of sale scheme. This applies where the business is identifying the VAT rate when they make the sale and, if all sales are standard rated, they simply apply the VAT fraction to calculate the VAT due. As there is no retail scheme calculation per se to undertake then these businesses often do not realise that they are using a retail scheme.


So, these cash businesses can therefore benefit from the relaxation set out above in relation to their retail sales ie they can simply record their Daily Gross Takings in their digital records. They do not need to record each individual sale, nor is a digital link required between their tills and their accounting records – the input of the Daily Gross Takings is the start of the digital journey.


Any non-retail sales will need to be recorded in the digital records on a supply-by-supply basis as they do not benefit from this relaxation.

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