Charged on almost all commercial activity, from the goods you import to your business expenses, value added tax (VAT) will affect all aspects of your business, overseas or at home.
Understanding when you should register and when you can reclaim is vital to trade compliantly and optimise cash flow.
VAT is added to most products and services and will be levied on goods at each stage of the supply chain where, as the name suggests, value is added.
Businesses will incur VAT on goods and services purchased (input VAT) and charge VAT on their sales (output VAT), the difference is either paid or reclaimed back from HMRC. However, knowing when to reclaim is fundamental.
VAT is added to almost every transaction which is why traders must stay on top of recordkeeping, understand when they’re able to reclaim and make sure they’re in a position to do so.
VAT will be charged in the country of import, subject to the Incoterms agreed between the buyer and the seller. This means exporters must research VAT and other commercial tax implications when trading overseas.
This is especially important for those trading with the EU post-Brexit as import VAT is now payable so if delivering using DDP Incoterms the UK exporter must pay the import VAT. If not registered for VAT in that country they won’t be able to reclaim it which will make a significant dent in their bottom line. It’s also important to remember that VAT rates vary depending on the EU member state.
It’s the place of supply that determines the VAT charges i.e. where the customer is based. So when selling to a customer in Germany, it is the German VAT rate that the customer will pay when the goods are imported even if they cross the EU border in France.
However, VAT is not charged on exports. This frequently causes confusion amongst consumers buying ouyside of their customs jurisdiction because they are hit with import VAT when the goods are delivered (usually via a demand from the courier company) rather than having paid sales VAT at point of purchase as they would do when buying within the customs territory where they reside. This results in many ecommerce purchases being rejected because the consumer wasn’t aware they would have to pay this tax on top of the purchase price.
Export sales can prove problematic for retailers too from a VAT perspective, traders should always have sufficient proof of export or else HMRC may disallow the ‘zero rating’ on VAT that the goods would otherwise attract.
To reduce the number of rejected orders, many UK companies registered for VAT in EU member states so they could deliver DDP and claim back the VAT.
The same cost-benefit considerations will apply as when registering in the UK. Because VAT registration can be expensive, some businesses will look to find a financial representative in the country of exportation who is able to make claims on their behalf.
As mentioned above, understanding the implications of your Incoterms is a vital consideration when deciding whether to register overseas.
Countless traders have been caught out by selecting Delivery Duty Paid (DDP) – the term under which the seller assumes all obligations for the goods until they reach the buyer – and not being sufficiently prepared to reclaim the VAT.
VAT implications will vary by business type, products sold, whether you sell via e-commerce and, of course, where you’re supplying your goods – place of supply is what determines VAT due on your goods.”
He also urges all traders to think carefully about how they handle returns to ensure they’re accurate and compliant.
For ecommerce businesses selling goods below a specific value designated by the EU, it is worth considering registering for IOSS (Import One Stop Shop). You will need to be registered for VAT in the UK and one of the EU member states, more information can be found here – Register for the VAT Import One Stop Shop Scheme – GOV.UK
For customised, practical advice about international VAT or anything else contact us today: info@theinternationaltradeconsultancy.com