"Do I Charge VAT to EU Customers?" An Overview of VAT Rules Post-Brexit
Should you be charging VAT to your EU customers? In some cases yes, in others no. Read on to learn more.
Imagine you’re a UK business owner who has been dealing with customers in the EU for years. Suddenly, Brexit becomes a reality, and now you’re faced with a myriad of new VAT rules and regulations. One common question is, “Do I charge VAT to EU customers?”. Even a few years into Brexit, it can still be difficult to get your head around the changes. In this post, we’ll guide you through the VAT landscape post-Brexit and help you navigate the complexities of trading with EU customers, including whether or not to charge VAT.
- UK businesses must comply with UK VAT rules when trading with EU customers.
- VAT regulations vary depending on the type of service and circumstances, while “Use and Enjoyment” rules apply to services sold outside the UK.
- Businesses exporting goods or supplying digital services must remain organized & up-to-date with their VAT reporting obligations.
Understanding UK VAT rules for businesses
Value Added Tax (VAT) is a tax on goods and services collected by the government, serving as a source of revenue and ensuring businesses pay their fair share of taxes. UK businesses must register for VAT when their annual turnover exceeds £85,000 and provide their VAT number to suppliers when making purchases. UK businesses must pay UK VAT at the standard rate of 20%, but certain goods and services, such as postage stamps, insurance and financial services and transactions, are exempt.
Post-Brexit, the VAT rules for supplies of goods to and from third countries now apply to supplies to and from the EU. UK businesses can no longer use the electronic system to recover VAT incurred in other EU countries, but can claim refunds using the existing refund system for non-EU businesses. However, the requirements vary across each EU country. To make this happen, HMRC has created a service that allows UK VAT numbers for cross-border supplies to be validated in an efficient way.
Understanding and complying with UK VAT rules, including when you or your customers need to pay VAT, are essential for businesses to operate legally and efficiently. Staying updated on these rules will help you avoid any pitfalls and ensure a smooth trading relationship with your EU customers.
VAT on services to EU customers
The VAT rules for UK businesses providing services to EU customers generally depend on the type of service and the circumstances. Here are some key points to keep in mind:
- B2B transactions follow the reverse charge mechanism.
- B2C transactions may require charging VAT at the UK rate.
- The pre-Brexit B2B principle remains unchanged, with only limited changes to VAT on services.
- Certain cross-border B2C services to EU and UK consumers may have specific VAT requirements.
In the following subsections, we’ll take a closer look at the VAT rules for B2B and B2C transactions, providing you with a better understanding of how they impact your business dealings with EU customers.
Business-to-Business (B2B) transactions
For B2B services between the UK and the EU, the business customer in the relevant EU Member State is responsible for self-accounting for VAT under the reverse charge mechanism. This means that UK businesses providing services to EU companies must be aware of the VAT treatment and ensure compliance with the applicable rules. UK Invoices to EU customers should include the customer’s EU VAT number. Additionally, a note should be included indicating that “No UK VAT charged – reverse charge on your VAT return”.
The reverse charge mechanism refers to a situation where customers are responsible for accounting for VAT themselves, ensuring that the VAT obligations are correctly allocated. For example, if a UK-based management consultant carries out work on behalf of a business customer in France, the place of supply for VAT purposes is France. Invoices for these types of transactions must include the business customer’s VAT number. Additionally, the phrase “reverse charge VAT applies to this transaction” should be clearly stated.
Business-to-Consumer (B2C) transactions
UK suppliers of B2C services are generally required to charge UK VAT on sales to their customers located in the EU. They must also charge UK VAT for customer transactions outside of the EU. Special rules are applied to certain B2C services. These rules vary from one service to another. For instance, non-land-related legal services supplied by a UK lawyer to an EU (or other non-UK) non-business client are exempt from UK VAT. Such special rules ensure that VAT is correctly applied and accounted for in various situations.
Understanding the various rules that apply to B2C transactions is crucial to ensure your business complies with the correct VAT obligations and maintains a good relationship with EU customers.
Importing goods from the EU
When importing goods and services from the EU, UK businesses must account for VAT through the reverse charge mechanism.
Here are some key points to remember.
- All goods entering the UK as parcels sent by overseas businesses are liable for VAT, unless they are zero-rated.
- The value threshold for VAT on imported goods is set at £135.
- UK VAT-registered businesses importing goods to the UK can account for import VAT on their VAT return.
VAT must be paid on goods bought from countries outside the UK, with UK VAT rates applying. Postponed accounting for import VAT was introduced for all imports from 1 January 2021, allowing businesses to avoid paying import VAT upon the arrival of goods in the UK and instead account for it on their VAT return.
This deferred payment system can ease cash flow for UK businesses and help alleviate some of the financial challenges associated with importing goods and services from the EU.
Exporting goods to the EU
Exporting goods to the EU requires the payment of import VAT and applicable customs duties (tariffs) upon the goods’ arrival in the EU. To ensure compliance, UK businesses exporting zero-rated goods to EU businesses must maintain evidence demonstrating that goods have been exported from the UK.
The Common Transit Convention (CTC) is a mechanism devised to simplify the customs procedures for businesses. It allows companies to:
- Defer payment of VAT and customs duties until their goods reach their final destination
- Streamline their export process
- Reduce upfront costs when exporting goods to the EU
By utilizing the CTC, UK businesses can benefit from these advantages in the UK business landscape, making it an ideal environment for a UK company.
Supplying digital services to the EU
UK businesses providing digital services to EU customers must charge VAT according to the rate of the customer’s country of residence and declare such sales to the appropriate EU Member State. Businesses can register for VAT in each EU Member State or opt for the VAT OSS non-union scheme. This non eu- scheme allows them to register for VAT in an EU Member State of their choice.
Non-UK businesses that previously used the UK VAT MOSS non-union scheme must now register for the scheme in an EU Member State and declare sales of digital services to UK consumers by registering for VAT in the UK and declaring the sales via a UK VAT return. To find the most up-to-date guidance regarding VAT on the supply of digital services and VAT OSS, you can visit HMRC’s website.
By understanding and adhering to these rules, UK businesses supplying digital services to the EU can ensure they remain compliant and maintain a strong relationship with their EU customers.
Navigating "Use and Enjoyment" rules
The “Use and Enjoyment” rules determine the place of supply of a service based on the effective use and enjoyment of the service. These rules apply to certain services, such as the hiring of movable goods. Refer to VAT Notice 741A if you wish to find the list of UK services subject to a ‘use and enjoyment’ override. This information can be obtained by looking at Section 13 of the published notice.
By being aware of these rules, UK businesses selling services outside the UK can ensure they are accurately applying VAT based on the effective use and enjoyment of their services, avoiding potential compliance issues.
How to report VAT on EU transactions
UK businesses are required to submit their VAT return digitally to HMRC every three months. The deadline for submitting a VAT return and making payment electronically is one month and seven days after the end of each accounting period. Failing to meet a VAT return deadline or payment will result in a default, triggering a surcharge period and potential financial penalties.
To avoid these penalties, it’s vital for UK businesses to stay organized and up-to-date with their VAT reporting obligations. Utilizing tools such as VAT software and working with professional tax specialists can help businesses stay compliant and avoid potential fines.
In addition to timely reporting, ensuring accurate VAT documentation, such as invoices with the correct VAT numbers and information, will help businesses maintain a clear record of their transactions with EU customers.
Navigating the complex world of VAT post-Brexit may seem challenging, but with a thorough understanding of the rules and regulations, UK businesses can continue to thrive when trading with EU customers. By staying informed, compliant, and adaptable, there's no reason why UK businesses can't overcome VAT difficulties and maintain strong relationships with their EU partners.
Do you need help with your VAT compliance? Book a free call with one of our VAT experts to find bespoke solutions for your business, optimize your VAT costs, and reach millions of new potential customers.
Frequently Asked Questions
Do UK businesses need to register for VAT in each EU country where they sell digital services?
UK businesses do not need to register for VAT in each EU country where they sell digital services, as they can instead opt for the VAT OSS non-union scheme in a chosen EU Member State.
Under the VAT OSS scheme, businesses can register in one EU Member State and then pay VAT due in each EU country where they sell digital services. This simplifies the process of VAT registration and payment for businesses operating in multiple EU countries.
What is the "Use and Enjoyment" rule?
The “Use and Enjoyment” rule establishes that for certain services, such as the hiring of movable goods, the place of supply of services, is determined by the effective use and enjoyment of the service.
This rule is important for businesses to understand when determining the place of supply for their services. It's also important for customers to understand, as it can affect the amount of taxes they may be liable for.
Are there any exceptions to charging UK VAT for B2C services provided to EU customers?
Yes, certain B2C services such as non-land-related legal services supplied by a UK lawyer to an EU non-business client are exempt from UK VAT.
What is the deadline for submitting a UK VAT return and making payment electronically?
The UK VAT return and payment deadline is one month and seven days after the end of each accounting period.