The complexity of the indirect tax laws in the United Kingdom can be difficult for foreign companies to navigate when selling in the UK initially. Anyone who imports goods must consider Customs Duty, and the sellers of both services and goods must also consider a VAT. Taxes on Customs and VAT are both referred by the name indirect tax. Customs Duty is not recoverable; however, the VAT paid to importers by a company can, in principle, be recovered; however, it is only sometimes.
Since businesses are required to pay VAT on purchases and have to account for VAT on the sale, the VAT that is ‘under control’ at any given time could be as high as 40% total revenue and costs of a business. Even a minor error could cause significant changes to expenses. Therefore, it is better to prevent than cure, and a thorough examination regarding whether UK VAT has to be recorded on sales, as well as the determination of whether VAT can be claimed on purchases, is advised.
Basics of VAT
The rate for UK VAT stands at 20%; however, there are additional 5 percentages and zero rates. Certain types of transactions could also be eligible for exemption or fall outside of the area of UK VAT completely.
There isn’t a UK VAT limit for foreign businesses that trade within the UK. This means that even a sale of a small amount can be enough to trigger the requirement to register VAT to the UK to be able to claim any VAT incurred or charged.
Some VAT regulations take into account:
- the location of the supply, i.e., the country in which VAT is due
- the VAT rate applicable
Who is responsible for the VAT? Due usually, this is the provider; however, there are instances when the customer is the one who accounts for VAT, which is sometimes referred to as the reverse Charge mechanism.
The above rules can differ depending on whether the business sells services or goods. The line between them is sometimes unclear.
If a company is UK VAT-registered will need to prepare a VAT return each three months, however it is possible to submit returns on a monthly basis to help cash flow if the company is in a tax repayment situation. In addition, as of April 1st, 2023, it will become mandatory for all UK VAT-registered businesses to file VAT returns in digital format per the Making Tax Digital (MTD) to meet VAT requirements. They must also keep electronic records of all transactions reported on every return. This allows them to trace a specific transaction’s origin from its data sources, such as the accounting program they use or an Excel spreadsheet, and to the final VAT return box numbers.
Making sure that the correct VAT rate is set isn’t just important from a compliance standpoint However, it could affect margins, especially in dealing with consumers who are more sensitive to the VAT-inclusive cost.
There are exemptions from the VAT charge that are applicable to specific medical, financial, insurance as well as gaming-related services. This creates more complexity since companies are not required to charge VAT on sales exempt from VAT; however, the seller cannot collect VAT on its purchases related solely to those supplies exempt from VAT. This can lead to businesses being partially exempt from VAT, and having the requirement to conduct extensive calculations to figure out what amount of VAT that they could claim.
Basics of Customs Duty
Imported goods to the UK must be declared by filing a customs entry containing data elements that relate particularly to the kind of product (commodity code) as well as their origin and value. The customs threshold must be filed by an organization based within the UK, typically an agent for customs clearance who represents an importer. The importer must possess a UK EORI number or, if they are not based in the UK, must be authorized by an agent willing to accept the liability for any liabilities arising due to this declaration (indirect assertion).
After Brexit Post Brexit, the UK has signed preferential trade agreements with certain countries, and the UK government is still striving to sign more trade agreements. In the absence of trade agreements, like in the US, UK customs duty will be assessed when merchandise is imported into the UK. When the items are part of a UK VAT-registered importer, VAT on imports is generally applicable if certain administrative requirements are observed. There are various rules for determining the amount of customs duty that must be paid based upon factors such as the source or value and classification of the imports.
Since importers are legally accountable for the quality of their declarations in the customs, It is highly recommended that clear instructions be given to customs agents and that they conduct checks to ensure that those instructions are adhered to. The reports can be obtained by contacting HMRC with all the information provided by and on behalf of an exporter (MSS information).
Things to consider when selling products in the UK
The general location of supply regulations for B2C and B2B goods sales stipulates that VAT must be charged wherever the purchaser is. Therefore, businesses not based in the UK and selling taxable products of any value within the UK must register for UK VAT because there is no threshold for VAT registration for non-established businesses that are not established in the UK. As mentioned above, obtaining a UK VAT registration will typically require companies to provide quarterly (or sometimes each month) taxes to UK Tax authorities. A valid VAT receipt that satisfies certain criteria must also be sent to non-business and business customers within the UK.
When products that are physically located outside of the UK are imported into the UK, there will be a person who has to serve as”the “importer in charge” to pay the taxes on imports to be paid. Import taxes comprise two major components.
- Customs Duty that cannot be recovered.
- Import VAT is refundable, provided you follow the correct procedures.
In the case of imports of goods (consignments) worth PS135 at or lower, sellers from outside the UK selling to UK customers must be VAT registered and charge VAT on the day of purchase. This is instead of having to pay import VAT. Foreign sellers who sell to UK companies can avoid filling out a UK VAT registration if the buyer self-accounts to pay the VAT due in the UK. UK tax is due.
Consignments that are valued over PS135 will be subject to the rules of import VAT. That means non-UK sellers could be required to VAT register to pay the import VAT and duty on clearance. They can also recover the import VAT in their UK VAT tax returns. They have to account for VAT sales for domestic goods in the UK. In addition, the seller from overseas could stay clear of being subject to the UK tax obligations when the customer is willing to be the official importer.
However, businesses not based in the UK can only tax VAT for UK transactions after they get the UK VAT number, even though VAT is due to UK Tax authorities. In this regard, businesses not from the UK who wait to get the UK VAT number should raise their prices to reflect this additional VAT charge and inform their customers of the reason behind this price increase. After receiving their UK VAT number, non-K companies should send out sales invoices with the correct amount of VAT.
Things to consider when selling products in the UK
In the case of cross-border service sales, specific “place of supply” rules define the country from which VAT is due. The most common laws of supply applicable to the sale of services are as follows.
- Regarding B2B selling, the point of supply is where the client is located.
- Regarding B2C selling, the country of supply is the country to which the supplier is.
Companies from outside the United Kingdom that don’t have a presence in the UK are likely to be required to register for UK VAT if the point where they provide their services is located in the UK. But, if the company has a presence in the UK, such as an office or server, it is important to determine if it is an established establishment in the UK to usually require the company from outside to sign up for VAT registration within the UK and charge UK VAT on sales.
An establishment that is fixed one other than a business establishment that has permanent technical and human resources required to offer or receive services. If an international company has an infrequent presence of technical and human resources in the UK, however, it only constitutes a fixed location that is located in the UK.
If there is no requirement for an overseas company to be registered for UK VAT, no VAT will be imposed for the provisioning service to UK customers. If B2B services are specific to UK VAT-registered companies The UK company itself must self-account any VAT that is due, by through the Reverse Charge system.
However, some exceptions exist to these place of supply rules, such as the examples below.
Services related to land, like the grant, assignment or give-up of any stake or right over land and other services offered by auctioneers, estate agents as well as architects, surveyors engineers, and other experts who deal with matters relating to land. In these situations, the location of supply is where the land is.
The hiring of goods apart from transport methods is covered by the general rules of the place of supply mentioned above. However, if a collection is considered to have been produced in the UK, the products are utilized and enjoyed outside the UK. Then the purchase is deemed made in the country where it was made. Therefore, B2B supplies subject to the ‘use and enjoyment rules are not considered to have been conducted within the UK.
Broadcasting, telecommunications, and electronic services also fall under the use and enjoyment provision. The place of supply will likely occur in the area when these services are being utilized and appreciated. There has been a rise in companies offering electronic services. Most countries, not only the UK, will require an international supplier of these services to consumers to be registered and pay tax in the state where the service is consumed (effectively the consumer’s place).
It is necessary to take certain actions for companies operating from overseas.
As mentioned above that there are many different indirect tax options for overseas companies that conduct business within the UK. Therefore, companies operating in the UK should seek local guidance to identify the most effective and tax-compliant indirect tax strategies and processes available to them.
