The complexities of the UK’s indirect tax landscape can be challenging for US trading partners to deal with owing to a lack of familiarity with the rules and requirements. Additionally, the UK’s departure from the EU at the end of January 2020 has resulted in new tax rules impacting cross-border trade. This article sets-out VAT and Customs Duty considerations for US businesses trading in the UK.
The primary difference between Sales Tax in the US and VAT in the UK is that VAT is a cascade tax; VAT is likely to be chargeable on each leg of the supply chain, and is generally recoverable by businesses. VAT is intended to be a tax on the ‘value-added’ by each business in the chain, and ultimately the cost of the tax should be borne by the end consumer. However, there is additional complexity as the UK VAT system also contains a number of different VAT rates and certain exemptions which all need to be considered by businesses when trading in the UK.
Businesses should keep in mind that getting this wrong can lead to unexpected VAT costs. As businesses are charged VAT on their purchases and account for VAT on their sales, the VAT ‘under management’ at any one time can be as much as 40% of the total of costs and revenue of a business, and even a small error can lead to substantial impacts on costs. As such, prevention is always better than cure, and advanced consideration of whether UK VAT needs to be accounted for on sales, along with determining whether VAT can be reclaimed on purchases, is recommended.
VAT Basics
The standard-rate of UK VAT is 20%, but there are also 5% and 0% rates. Certain transactions may also qualify for exemption or be outside the scope of UK VAT entirely.
There is no UK VAT registration threshold for overseas businesses trading in the UK. As a result, even one sale of a modest value can trigger an obligation to register for VAT in the UK in order to account for any VAT charged or incurred.
There are a series of VAT rules that consider:
· the place of supply i.e. in which country the VAT is due
· the rate of VAT applicable
· who accounts for the VAT due – this is normally the supplier, but there can be instances where the customer self-accounts for the VAT which is known as the Reverse Charge mechanism.
The rules above also vary depending on whether the business is selling goods or services, and the dividing line between the two is not always clear.
Once a business is UK VAT registered, it typically has to file a VAT return every three months, although there is an option to file returns monthly which can help with cashflow should the business regularly be in a VAT repayment position. Furthermore, from 1 April 2022 it is a requirement for all UK VAT registered businesses to prepare and submit VAT returns digitally in accordance with the Making Tax Digital (MTD) for VAT requirements. They must also maintain digital records of all transactions to be included within each return, which effectively results in the ability to digitally trace a particular transaction from the original data source, such as their accounting software or an Excel spreadsheet, all the way through to their final VAT return box figures.
As noted above, the standard-rate of UK VAT is 20%, but there are also 5% and 0% rates. Getting the VAT rate right is not only important from a compliance perspective, but it can also have a significant impact on margins, particularly when dealing with consumers who will be sensitive to the VAT-inclusive price.
There are also exemptions from charging VAT which apply to certain financial, insurance, medical and gaming services. This adds additional complexity as there is no need for businesses to charge VAT on exempt sales, but the supplier is unable to recover the VAT on its purchases relating solely to those exempt supplies. This can result in businesses being partially-exempt, with the need to carry out detailed calculations to determine the amount of VAT they can reclaim.
Customs Duty Basics
Goods imported to the UK must be declared by the submission of a customs entry, containing data elements related, in particular, to the type of goods (commodity code), their origin and their value. The customs entry must be submitted by an entity established in the UK – usually a customs clearance agent, representing an importer. The importer must have a UK EORI number, or if not established in the UK, be represented by an agent willing to take responsibility for any liability arising from the declaration (indirect representation).
The US has no preferential trade agreement with the UK, so for most goods customs duty will be charged at the point of entry. Where the goods are owned by a UK VAT registered importer, import VAT is in principle recoverable provided certain administrative steps are followed.
Goods imported to the UK from a related party in the US (or elsewhere) may require evidence that the declared customs value is not influenced by the relationship. This is usually covered by a transfer pricing policy, agreed by the US Internal Revenue Service. It should be noted that any additional payments arising from a transfer pricing policy will also be subject to customs duty. This may include certain royalties.
As importers are legally responsible for the accuracy their customs declarations, it is recommended that clear instructions are provided to customs agents, and that checks are performed to ensure those instructions are followed. Reports can be obtained from HMRC containing all data declared by, or on behalf of an importer (MSS data).
Considerations When Selling Goods In The UK
The general place of supply rules for the sale of both B2B and B2C goods state that VAT should be charged where the customer is located. As such, non-UK businesses selling any taxable goods for any value in the UK are required to register for UK VAT, due to there being no VAT registration threshold for non-established sellers in the UK. As discussed above, a UK VAT registration will usually require a business to submit quarterly (or occasionally monthly) VAT returns to the UK tax authorities. Valid VAT invoices that meet certain criteria will also need to be issued to both business and non-business customers in the UK.
Often goods originate in the US (or more generally, outside of the UK), which are then imported into the UK. This will require someone (i.e. the importer of record) to pay the import taxes due. Import taxes have two main components.
1. Customs Duty, which is irrecoverable.
2. Import VAT, which can be reclaimed, provided correct steps are taken.
A new set of arrangements were introduced with effect from 1 January 2021 for imports of goods (consignments) valued at £135 or less. The UK tax authority requires businesses who are selling such goods to UK consumers to register and charge VAT at the point of sale on consignments not exceeding £135. This is instead of paying import VAT. Overseas sellers to UK businesses should be able to avoid having to UK VAT register if the customer self-accounts for the UK VAT due.
Consignments valued at over £135 are subject to import VAT rules. This means that businesses may need to VAT register to pay the import VAT and duties on clearance, and will be able to reclaim this import VAT on their UK VAT returns. They will then account for sales VAT on a domestic sale of the goods made within the UK. Alternatively, the overseas seller may be able to avoid having any UK VAT obligations if its customer agrees to act as the importer of record.
However, non-UK businesses are unable to start charging VAT on UK sales until they receive their UK VAT registration number, despite this VAT still being owed to the UK tax authorities. As such, it is recommended that non-UK businesses waiting to receive their UK VAT registration number should increase their prices to recognise this additional VAT charge, and to tell their customers the reason for this increase. Once their UK VAT registration number has been received, non-UK businesses should then reissue their sales invoices showing the correct VAT amount.
Considerations When Selling Services In The UK
Any VAT on services sold to the UK from the US are typically determined by the place of supply rules. The general place of supply rules for services are as follows.
o For B2B sales, the place of supply is the country where the customer belongs.
o For B2C sales, the place of supply is the country where the supplier belongs.
It should be noted that US businesses that do not have a presence in the UK, are unlikely to need to register for UK VAT when the place of supply of their services is in the UK. However, where the US business has some sort of presence in the UK, for example a server or an office, care is needed to determine whether this creates a fixed establishment in the UK, as this will typically require the US company to register for VAT in the UK and to charge UK VAT on its sales.
A fixed establishment is an establishment other than the business establishment, which has the permanent human and technical resources necessary for providing or receiving services. If a US business has a temporary presence of human and technical resources in the UK, this does not create a fixed establishment in the UK.
If there is no need for a US business to register for UK VAT, then no VAT will be charged on the supply of their services to UK customers. For B2B supplies of services made specifically to UK VAT registered businesses, the UK business itself is required to self-account for any VAT due using the Reverse Charge mechanism.
There are, however, a number of exceptions to these place of supply rules, including the following examples.
o Services relating to land, such as the grant, assignment or surrender of any interest in or right over land, and services that are supplied by estate agents, auctioneers, architects, surveyors, engineers and others involve din matters relating to land. In these cases, the place of supply is where the land is located.
o Hiring of goods, other than means of transport, is covered by the general place of supply rules discussed above. However, if a supply is treated as being made in the UK, but the goods are effectively used and enjoyed outside the UK, then the supply is seen to have take place in that country. As such, B2B supplies subject to these ‘use and enjoyment’ provisions are not seen to have taken place in the UK.
o Broadcasting, telecommunications and electronic services also fall within the above-mentioned ‘use and enjoyment’ provisions, and the place of supply will be seen to have taken place where these services are effectively used and enjoyed.
Actions Required For US Businesses
As evidenced above, there are a number of different indirect tax considerations for US businesses when doing business in the UK. It is therefore recommended that US businesses trading in the UK should seek local advice in order to determine the most efficient and compliant indirect tax options and procedures available to them.