Whether you're a small business owner or a seasoned entrepreneur, understanding your VAT obligations is crucial. The main question on every UK business owner's mind is, "Do I have to charge VAT to overseas customers?" or "do you charge vat on international sales?". Let's delve into the specifics and demystify the complexities of VAT regulations, ensuring you remain compliant while expanding your business across borders.
Understanding ‘Place of Supply’
Understanding the concept of 'place of supply' is fundamental to determine your VAT obligations. It refers to the location where your goods or services are considered to be supplied for tax purposes. The rules for determining the 'place of supply' differ for goods and services.
- For Goods: The ‘place of supply’ is the place where you make a supply and where you may be charged and pay VAT.
- For Services: There are various rules to determine the “place of supply” depending on:
- whether you’ve more than one business location
- the kind of service you provide
- the place where your business or your business customer ‘belongs’
When Do Businesses Need to Register for VAT?
In the United Kingdom, Value Added Tax (VAT) is a tax collected by businesses registered for VAT and paid to HMRC. If your business's annual turnover exceeds the VAT threshold 2024 i.e £85,000, you are legally required to register for VAT. This VAT threshold includes all the income from UK and EU services, assets, and taxable income. Typically, businesses pass on this tax to their business customers.
Sometimes, businesses choose to register for VAT even when their turnover is below £85,000 so that they can reclaim the VAT paid on their business purchases. Registering for VAT is not possible if your business sells VAT-exempt services or goods.
Should I Charge VAT EU Services and Goods to Companies Outside the UK?
Determining VAT for goods and services to EU businesses is a bit tricky:
Are you selling products or services?
The answer to this question is important to determine the “place of supply”. If you’re selling a physical product, the place of supply is where the seller is—so UK VAT rules apply. If you’re selling services, the place of supply is where the consumer is—so for services, VAT rules of the consumer’s country should be considered.
Are you selling goods and services to another business or an individual consumer?
Identifying the buyer type is simple – if they have a VAT number, they are considered a business. If they don’t have a VAT number, regardless of their business status, they are treated as consumers (non-business) for UK VAT purposes.
Trading with other EU countries
Selling to Consumers in the EU - charge VAT at 20% on services and supplies to EU businesses
Supplying Goods to an EU Business Customer - This transaction is known as dispatch and charged with 0% VAT. In this case, you must include the VAT number of your EU business customer and here, the Reverse Charge Rules apply.
Selling Services to an EU Business Customer - Reverse Charge Rules apply to VAT on selling services to EU customers. In this case, your business customers charge the VAT to themselves and pay VAT in their country.
VAT on Services Outside the EU Countries or the Rest of the World
This type of transaction is known as export and most services and goods you supply to countries outside the EU (rest of the world) are considered outside the scope of UK VAT and therefore VAT exempt.