If you are a value added tax, or VAT, registered business located in the UK or throughout the European Union, and you plan to trade throughout the EU, you must become familiar with the policies involving international trading customs.
These are a little more complicated than what is required for domestic handling of VAT, so if you will be dealing in international affairs, be sure to read this thoroughly and do a fair amount of your own research as well.
Trading Within The European Union
Exporting is incidentally the incorrect term for transferring goods between nations of the EU. Within the European Union, exporting is actually more accurately referred to as despatches, or removals. Exporting is what takes place if you are supplying goods to a country that is not a member of the EU.
When you despatch products from the UK to another country in the European Union, and the beneficiary does not happen to be registered for VAT within their own country, you must charge value added tax, even if you are simply sending these goods to another branch of your organisation. In this way, it is advisable to register all branches of your business for VAT if it is applicable.
If you are shipping your wares to a company or individual in another EU country who is registered for VAT, your shipment can be zero rated, but only if it meets certain additional conditions. You must first obtain the VAT registration number of your buyer, along with the two letter country code, and display this information on your sales invoice. You must also be able to furnish paperwork documenting the “evidence of removal” of these goods from the UK to the other country. Lastly, you are required to obtain additional evidence of removal within a certain timeframe, usually three months.
Be Meticulous With Your Record Keeping
This evidence of removal is crucial, it can include, but is not limited to, customer orders, documented interaction with customers, invoices, bills of lading, and other documentation proving receipt and payment of the goods originating from the destination country. Specificity cannot be overlooked, as all evidences of removal should contain information about you and your business, the business of your customer, the products you are shipping and their value, where the goods are being shipped, and how they are getting there. Be sure to preserve all of this information for at least six years, as lack of this may force you to pay all of the associated VAT.
It is sound procedure to attempt to verify the VAT number supplied to you by your customer in order to guard against any other deceitful practices of this nature. This won’t verify the details that have also been supplied to you, and this can best be done by contacting the HMRC directly if you have any doubts.
Trading Outside Of The European Union
If you are exporting goods to a country that does not belong to the EU, VAT does not apply. To account for this, you are best advised to zero rate the transaction, while still preserving the evidence of removal of the goods from the UK within three months of the sale. Since more processing can be required for exports of this nature, three months is not always the time limit.
As for international importing from another country into the UK, different rules do apply, although if you are familiar with common domestic VAT practices, these are similar. Like exporting, importing is not the correct term when referring to countries located within the EU, and it should instead be called acquiring, and the tax known as acquisition tax. When making an acquisition, it is your duty as a VAT registered person to pay the value added tax on every applicable item, as if you were purchasing those goods within the UK. You must fully account for the acquisition taxes you have paid on your VAT return associated with the tax point, and you can treat these taxes as input taxes. The tax point is the date on which the goods arrive in the UK, and it should be this date that you account for instead of the date of purchase.
Importing products from other non EU countries is also normally treated as though the products were purchased within the UK. Antiques and collector’s items can qualify for reduced rates. If you are registered for VAT, then you can reclaim your purchases of this nature, as they will still qualify as input tax. However, if you are not registered for VAT, then protocol is based on whether you are a UK or non-UK trader. If you are the former, you are still charged for the value added tax on what you purchase, but cannot reclaim it. If you are instead a non UK trader, you must hire a UK-based agent who will perform importing duties on your behalf. The agent will charge you at VAT standard rate for his services rendered, and you will not be able to reclaim this amount. However, the agent himself can recover the value tax incurred upon import into the UK as input tax.
Between countries of the EU, most products are already sold with the VAT of their country of origin added to the price. However, if you are in the business of car dealing, or plan to import a new vehicle, whether car, boat, or aircraft for some other purpose, VAT can be due on the craft if it can be considered a new means of transport, or NMT. A vehicle can be classed as an NMT if it is less than 6 months old or has been driven for more than 6,000 kilometres. This tax is due on the 15th day of the month after which the vehicle was procured by the buyer, or the date of the resultant tax invoice, if that happens to be earlier.
Obviously there are many other details that have not been covered here, but this should provide you with a good idea as to how to generally go about accounting for VAT when international sales are involved. If you fail to follow these protocols, you are subject to prosecution by the HMRC, and will at least be penalised if not imprisoned.