A guide to VAT rules and rates on exports
A guide to VAT rules and rates on exports
Export value-added tax (VAT) is a tax that is added to goods or services you sell to customers outside of the UK.
The type of VAT and rate you charge customers abroad is determined by where they’re based, whether they’re VAT-registered, your goods or services and the value of your sales.
However VAT looks to your business, it’s important to get it right to ensure that a) you’re complying with HM Revenue & Customs (HMRC) and local laws in the countries you operate in, and b) you’re able to reclaim the correct amount of tax on your VAT return.
In this post, you’ll learn how export VAT is charged on goods and services in the EU and the rest of the world, with checklists to ensure your exports run smoothly. We’ll also look at how export VAT will change after Brexit.
Note: ⚠️ The information in this post is correct up to 31 December 2020. From 1 January 2021, new rules and rates on exports will come into effect to reflect Britain’s post-Brexit relationship with the EU. Some of the changes are covered in this post, but we’ll update the content as and when new rules are rolled out. This post also assumes that you have basic knowledge of how VAT works. If you don’t, before diving into this post, read our guide to everything you need to know about VAT 🔑.
Table of contents
- Charging export VAT on services sold to EU countries
- Charging export VAT on goods sold to EU countries
- Export VAT for non-EU countries
- Essential checklists for exporting goods and services
- How will export VAT change after Brexit?
- Wrapping up
Charging export VAT on services sold to EU countries
As a general rule, if your UK business sells services to other businesses outside of the UK but within the EU, you do not need to charge VAT but your customer (the buyer) does have to pay VAT in their own country using the reverse charge. The word ‘pay’ is misleading, however, because the way it is set up means they actually do not need to pay any VAT on the purchase (we’ll untangle this in a moment).
However, if your business sells services to consumers outside of the UK, you do need to charge VAT, depending on the type of service.
Let’s break down the B2B and B2C scenarios in more detail.
If you sell services to businesses (B2B) in the EU
The reverse charge was created as a way to simplify processing B2B transactions across borders. As B2B sales to EU countries are considered outside of the scope of UK VAT, you don’t need to charge any VAT on behalf of HMRC in regards to them as long as the reverse charge applies.
If the reverse charge does not apply, however, you may be liable to register for VAT in your customer’s local country. The government via GOV.UK’s VAT Notice 741A Section 5.1 suggests that “if you’re a UK supplier providing services in an EU member state you should check with your customer and that member state how their rules work.”
In practice, this is reflected on paper by shifting the normal rules of responsibility for charging VAT from the seller (you) to the buyer (your customer), making you void of any VAT responsibilities in regards to the sale.
Your customer (the buyer) is now technically responsible for both charging output tax and paying input tax for this transaction. So instead of actually doing this, they need to declare both the output tax they would have charged you and the input tax you would have paid them in their VAT return under the same transaction, essentially cancelling each other out. This process offsets the need to pay or reclaim any VAT on the purchase.
Ultimately, the reverse charge is a complicated solution to a very simple reality: you do not need to charge VAT on export services and your customer does not need to pay VAT on import services bought from within the UK to EU countries and vice versa.
So if the roles are reversed and you are importing services from a B2B EU member state supplier to the UK and the reverse charge is applicable, your supplier does not need to charge you VAT and you must both credit the output tax you would have been charged and debit the input tax you would have paid in your VAT account—resulting in net £0.
While your head may be spinning, GOV.UK has confidence that this is not complicated at all. In fact, they write at the end of section 5.1 in VAT Notice 741A that:
“The reverse charge is not a complicated accounting procedure. Where it applies to services which you receive, you, the customer, must act as if you are both the supplier and the recipient of the services. It applies if your supplier belongs outside the UK even if they have a UK VAT registration number.”
While this article is not about VAT on imports, if you do find yourself in this situation when filing your VAT return, as described in section 5.2 of the same notice, you simply include in the relevant boxes the:
- Amount of output tax in box 1 (VAT due on sales)
- Amount of input tax in box 4 (VAT reclaimed on purchases)
- Full value of the supply in box 6 (total value of sales)
- Full value of the supply in box 7 (total value of purchases)
Top Tip: Filing your VAT return isn’t always straightforward. The best way to avoid making any mistakes is to know what the most common ones are so that you can steer clear of them. To learn more about the most common VAT return errors, read our guide to how to avoid and rectify common VAT mistakes 💡.
If you sell services to consumers (B2C) in the EU
If you sell services to consumers in the EU, you do need to add VAT to your invoices. The rate that you need to charge them depends on what type of service you offer.
1. If your services are non-digital (e.g. services that require your intervention to be delivered), you need to charge customers the standard UK rate of VAT (currently 20%).
For example, if you run a small building company that is hired to work on a home restoration project by an ex-pat living in France, your invoice would need to include the total amount for your work + 20%.
2. If your offer is digital (e.g. telecommunications, broadcasting or online services), you need to charge customers at their local rate of VAT and provide invoices that comply with the country’s VAT rules.
Note that the local rate of VAT is the rate where the digital service is received, not where the customer is based. So if a customer from Germany uses your services while on holiday in Portugal, the sale would be subject to Portuguese VAT.
If you have customers in several different countries, this would typically mean registering and filing VAT returns in every market you operate.
Thankfully, HMRC’s VAT Mini One Stop Shop (VAT MOSS) scheme saves you the hassle and increased workload by allowing you to register and pay VAT on export sales to HMRC instead.
Charging export VAT on goods sold to EU countries
Charging VAT on goods you sell to customers in the EU depends on whether the customer is VAT-registered.
1. If your customer is registered for VAT in their local country, you can ‘zero-rate’ sales, providing you keep records of your export goods leaving the UK within three months of the sale and obtain their local VAT number.
Zero rate means that the goods are still subject to VAT, but the rate you must charge is 0%. This shouldn’t be confused with VAT exemption, whereby goods don’t have to be declared. With zero-rate, any sales will still need to be reported on your VAT Return.
2. If your customer isn’t registered for VAT, the transaction is classed as a ‘distance sale’ and you need to charge UK VAT.
Top Tip: VAT exemption means that the goods or services you sell are outside of the scope of VAT and thus considered VAT exempt. If you only sell exempt services you are considered a VAT exempt business, but if you sell some exempt and some taxable goods or services you are considered a partially exempt business. To learn more about these distinctions, read our guides to VAT exemption and who it applies to and everything you need to know about VAT partial exemption ✅.
If you sell goods to consumers, public bodies or charities within the EU, you’ll most likely be using option two. Where distance sales become more complex is when your sales reach the distance selling EU VAT threshold in a particular country.
If this is the case, you need to register for VAT in that country and charge the local rate of VAT on sales. This counts for every EU member country you exceed the threshold in.
For example, let’s say Helen has a business selling t-shirts to consumers in Ireland and Germany. In Ireland, the distance selling VAT threshold is €35,000. As Helen sells €45,000 worth of t-shirts each year, she has to register for VAT in Ireland and charge customers the local rate of 23%. In Germany, Helen sells €80,000 worth of t-shirts, but as the distance selling VAT threshold there is €100,000 she doesn’t have to register for VAT and can continue charging customers the UK rate of 20%.
Export VAT for non-EU countries
VAT on the export of goods or services only applies within the EU. This means that sales to customers outside of the EU can be zero-rated.
However, to benefit from the zero-rating, you need to prove that goods have been exported within three months of sending them or receiving full payment. If you don’t have evidence of the export, you need to account for the full rate of VAT.
Acceptable documents for evidence include:
- A copy of the invoice
- Transportation documents
- Import customs records
Essential checklists for exporting goods and services
To ensure your exports run smoothly and you charge and pay the correct amount of VAT on goods and services exported in and outside of the EU, here are a few handy checklists to follow.
If you’re selling to countries in the EU
1. Check that the country you’re dealing with is part of the EU
Currently, the EU has 27 members: Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Spain and Sweden.
You can find an up-to-date list of EU member states on the European Union website.
2. Check whether your client or customer is VAT registered
Make sure you keep a record of customer VAT numbers. These will be needed to complete your EC Sales List.
3. Check that you’re applying the correct rate of VAT
- If you’re selling services to businesses, the reverse charge applies
- If you’re selling services to consumers, VAT is charged at the UK rate for non-digital services and the local VAT rate for digital services
- If you’re selling goods to VAT-registered customers, goods are zero-rated
- If you’re selling goods to non-VAT registered customers, UK VAT is charged up to the point that sales exceed the distance selling EU VAT threshold
4. Declare your exports
To fulfil your customs and duty obligations to HMRC, you’ll need to complete a Single Administrative Document (SAD) also known as form C88.
This document should detail:
- What your goods are
- The movement of goods
- The commodity code of goods (also known as Tariff code, HS code or classification code). You can find this by looking up your product in HMRC’s Trade Tariff.
- The customs procedure code (CPC). CPCs can be found on the GOV.UK website.
5. Provide the customer with a VAT invoice and keep copies of these invoices
If your sale is zero-rated, your invoice should include the customer’s VAT number. You should also keep proof of goods leaving the UK.
6. Declare sales on your VAT return and complete an EC Sales List (VAT101 form)
The total value of sales to EU countries should be recorded on your VAT return under ‘dispatches’ or ‘removals’.
The value of sales to each customer, along with their VAT numbers, need to be submitted to HMRC quarterly via an EC Sales List.
7. Check whether you need to complete an Intrastat return
You’ll need to register for Intrastat and complete monthly Intrastat Supplementary Declarations (SDs) if your total sales to EU countries is more than £250,000 per year (you’ll also need to register if your total imports exceed £1.5 million).
If you are approaching annual sales of £250,000, you may receive a letter from HMRC alerting you that you may need to register for Instrat soon. If you exceed £250,000, you will receive a letter from HMRC and once you register, you’ll be responsible for submitting monthly SDs.
This only applies to goods, so if your business provides services you don’t need to worry about registering unless your business also supplies goods as part of a contract for services.
For example, if you’re providing construction services, you won’t have to register for Intrastat. But if you’re providing construction services and supplying materials that you’re charging the customer for, you’ll need to register for Intrastat.
8. Monitor sales of goods against distance selling EU VAT thresholds
If you sell goods, check the EU VAT thresholds for each country in case you need to register for VAT and apply the local VAT rate on sales.
While each country has specific documents they’ll ask you to supply, in general, to register for VAT you’ll be asked for:
- Proof of VAT or tax registration in your country of domiciliation
- Your company incorporation certificate
- Your Articles of Association
- Proof of planned trade
- Proof of existence form the national company register
Selling to countries outside of the EU
1. Check that you’re applying the correct rate of VAT
Exports outside of the EU can be zero-rated, but you’ll need to provide documentation as proof that goods were transported.
2. Get your EORI number
An Economic Operator Registration and Identification (EORI) number prevents increased costs and delays when exporting goods to the rest of the world.
This is only required for goods. You don’t need to worry about an EORI for exporting services.
You can apply for your EORI number on the GOV.UK website.
2. Submit a customs declaration
Any goods sent outside of the EU must be declared on an export declaration to get your items through customs.
Declarations are submitted electronically using the National Export System before your goods arrive at the port of export.
You can submit a customs declaration yourself using the National Export System. However, you’ll need third-party software. The process can also be complex. Therefore, HMRC recommends that you get someone to deal with customs declarations for you, such as a freight forwarder, custom agent or broker or fast parcel operator.
A customs expert can work for you directly or indirectly to ensure your goods get through customs.
- A direct export service means that the person or service provider acts in your name, but you remain responsible for keeping records, providing accurate information on declarations and any Customs Duty or VAT.
- An indirect export service acts in their own name and is equally responsible for providing accurate information and jointly liable for any Customs Duty or VAT.
You can find out more about getting someone to help with customs on the GOV.UK website.
3. Provide customers with import paperwork
So that goods can be imported to their destination country, you need to provide customers with a commercial invoice. This is similar to a sales invoice and should include the following basic information:
- Importer’s name and address
- Invoice number
- Date of issue
- Details on the type of goods
- Quantity of goods
- Unit of measure
- Unit value
- Total item value
- Total invoice value and payment currency
- Terms of payment
- Terms of delivery
- Means of transport
Keep copies of all commercial invoices for your own records.
4. Declare details of your sales on your VAT return
Remember: though sales are zero-rated, they still need to be declared on your VAT return.
How will export VAT change after Brexit?
From 1 January 2021, rules on exports will change to reflect Britain’s new status as a non-EU member.
The UK will become a ‘third country’, which means businesses will need to go through the same processes as other non-EU countries when selling to the EU.
The biggest change as far as VAT is concerned is that exports to the EU will be treated in the same way as international trade exports, which means you can charge VAT at 0%.
The process of recording the value of exports on your VAT returns will stay the same. So you should record all export documentation and details of sales in the same way.
Beyond VAT, there are a number of changes on exporting that you’ll need to be aware of.
- Custom declarations for goods exported to the EU (these currently only apply to exporting goods to the rest of the world)
- Export licences and export certificates for goods including animals, plants, food and agricultural products, chemicals and waste, diamonds and controlled goods such as military items
- New marking, labelling and marketing standards for food, plant seeds and manufactured goods
- New rules for exporting and declaring excise duty goods (e.g. alcohol, tobacco and certain oils)
- An EORI number that starts with GB
You can find out what you need to do to get your business export-ready post Brexit by using HMRC’s step-by-step guide.
How much VAT you pay or whether you’re required to pay any at all depends on what you’re exporting and where you’re exporting to.
As a general rule, exports of goods to VAT-registered EU customers and exports of goods and services to customers in the rest of the world can be charged at 0% for VAT purposes. Every other type of sale is subject to VAT.
If you need to pay VAT on exports, make sure you’re aware of whether you need to pay the UK rate or local rate of tax, as well as the relevant VAT thresholds for individual countries.
This guide and the links we’ve included will help you do that, ensuring you stay on the good side of the tax collector and reclaim the correct amount of money you’re owed.
As always, if you’re unsure about anything VAT related, seek advice from your accountant. If you don’t already have an accountant, check out our guide on how to choose an accountant for your small business.
Photo by cottonbro, published on Pexels
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