Exports are Zero-rated for VAT aren’t they?

I was with a client the other day who’s just started trading internationally.  His business manufactures and instals award winning greenhouses.  “Exports are zero-rated for VAT aren’t they?” he said at one point.  I opened my mouth to yes but then hesitated as the answer is actually a bit more complicated than a straight yes or no.

He groaned but the honest answer is that it depends on what is being exported and to who, because those two factors determine where the location of the supply is deemed to be, and that governs whether VAT is chargeable and if so, at what rate.

“That all sounds like it’s going to make my head hurt and I guess importing isn’t straightforward either” he said.  So we grabbed a brew and went through it step by step.

Place of supply

The first thing to establish is whether the place of supply is in the UK or abroad.  When goods are imported or exported the answer is easy; it is the county from which they are dispatched.  However when the supply is a service, then its place of supply is determined by who receives it.  If the service is supplied to another business, making it a business-to-business (B2B) transaction, then the county in which the customer is located is the place of supply.  When services are provided to non-business customers (B2C) then the place of supply is the supplier’s country.  Understanding the place of supply makes it easier to understand when UK VAT is chargeable.

Exporting (selling overseas)

Let’s think about exporting goods first.  We know that the place of supply is the country of dispatch.  So UK based VAT registered businesses will need to charge UK VAT on any goods they export.  And just to keep it simple, VAT on any exported goods is charged at zero rate, regardless of the rate that would apply to sales made in the UK, like for example, on greenhouses.

Now let’s consider exporting services to non-business customers.  The place of supply is the country where the supplier is based, so again as that’s the UK, it means that UK VAT is chargeable.  The rate however, now depends on the supply as it is charged at the rate for equivalent services in the UK.  So, for example, as installing a greenhouse for a customer in the UK is a VATable service charged at the standard rate, this is the VAT rate that would be charged to a non-business customer abroad.

Finally, there are the overseas business customers who buy services, for example, maintenance and repairs.  As these are B2B transactions the country in which the customer is located is the place of supply.  As that is not the UK, then no UK VAT is chargeable.  However, we should check with the tax authority in that country, as for some supplies you may need to register and account for VAT in the country of supply.

Importing (purchasing from overseas)

The place of supply isn’t as important in relation to VAT on imported goods and services but the rules can still be a little confusing.  Again, let’s start with importing goods.  For example, imports of aluminium for greenhouse frames.  VAT is chargeable as if the goods had been bought in the UK.  So that’s easy enough.  The issue here is how the VAT is paid and reclaimed.  There are two options:

1. VAT can be paid at the point of entry into the UK, for example at the airport or docks.  It is then reclaimed, like any other input tax, via the VAT return.

or

2. Postponed accounting is used, which accounts for the value of the VAT due and the amount to be reclaimed on the same VAT return, meaning that no VAT is actually paid.

The end result of both methods is exactly the same; which is that there is no change in the overall net VAT position.  The difference is to do with cashflow and timings.  In the first option, the VAT is paid and then there is a delay before it can be reclaimed but in the second, no cash actually leaves the bank account to pay for the VAT element of the purchase.  Using postponed accounting has the added advantage of avoiding goods being held in customs until VAT is paid.

Finally, let’s deal with imported services.  To be VATable they will always be B2B transactions.  If services are provided by individuals who are not VAT registered then, just as in the UK, they won’t change any VAT so there won’t be any to reclaim.  The same rule applies in terms of the place of supply as it does to B2B exports, which is that the county in which the customer is located is the place of supply.  In other words, the UK, which means that UK VAT is chargeable. 

Again, it is not so much whether VAT is chargeable or not that is confusing but how it is accounted for.  In this case, the supplier will need to provide its VAT registration number and reverse charges will apply.  As the supplier is located, and registered for VAT, abroad, they cannot charge UK VAT.  Instead it is the customer’s responsibility to self-assess the VAT, in effect charging themselves the VAT and then claim it back.  In practice, this is the same as postponed accounting.

Summary for UK based VAT registered businesses:

Gill Myers is a self-employed accounts consultant. She has taught AAT qualifications since 2005 and written numerous articles and e-learning resources.