The Low Down on VAT Between UK and USA
VAT is a tax that you pay on many goods and services in the European Union (EU). It stands for value added tax and it’s a complicated subject, so this guide will help you understand what VAT is, when you need to charge it, how to do so effectively and more.
BUT VAT between the UK and USA is really easy. It’s the rest of the world you need to worry more about. And one more thing about VAT: you can get VAT returns for your business purchases, subtracting a whopping 20% off the price you pay.
Does VAT apply to services outside the UK?
Yes, VAT (value added tax) applies to services outside of the UK. VAT is a tax on consumption, which means it’s payable by the consumer and not the business providing the service.
It may seem like a strange concept at first, but if you think about it from one perspective: you’re paying for that service with your money; therefore, you should be taxed for its purchase.
Brexit has affected some VAT rules, but not for selling services for goods to the US.
Does VAT apply to USA?
VAT is a tax that must be paid on the supply of goods or services within the European Union. The rules for paying VAT vary depending on where your customer is located.
A lot of people think that VAT doesn’t apply to USA, but this is not true. Although the US has a different way of taxing goods and services than the EU, it does have a form of VAT called sales tax. There are also some other taxes that you need to be aware of when selling in America.
Charging VAT When Exporting Goods from UK to US
The majority of goods exported to the US can be zero-rated for VAT, which means that you don’t need to charge VAT on them.
However, you do need to charge a sales tax, which differs depending on the state in which your customer lives in. We know…taxes in the states is kind of a mess.
Typically, your payment gateway or payment services provider can calculate this automatically at checkout. All you need to know is that taxes in the US range between 0% and just over 10%.
If you’re dealing with a customer who doesn’t want to provide their location (for example, a shipping location isn’t necessary for digital products), then you have a couple options:
- Selling digital goods makes things easy. You charge the taxes based on the cardholder address information entered.
- Shipping physical products is bit more involved. Either you can charge a flat service fee that covers taxes at 10.25% and keep the change after processing or give them a refund on the amount overpaid.
- Or, that person might owe once the product arrives by mail carrier. This is the least-successful method because Americans are not keen on paying for products upon arrive. It’s just not a thing that they’re accustomed to when it comes to receiving packages.
Charging VAT When Importing Goods from US to UK
If you’re importing goods from the USA to the UK, there are a few things to be aware of. The first is that there is no VAT charged on goods imported from outside the EU.
This means that if you’re buying something online from a US-based company and it’s being shipped over here, then you won’t have to pay any import charges (though there may be costs associated with having items shipped internationally).
The second thing to note is that if your item was made in the US and sent via a third country before coming into the UK, then this will not impact its status as being free of import taxes.
As long as it wasn’t manufactured specifically for sale in Europe or another part of the world where VAT applies (such as Australia), then you won’t need to pay anything extra at customs when it arrives here.
How do I charge VAT on services to USA?
To charge VAT, you need to adjust your thinking a bit. VAT doesn’t exist in the states. Instead, you need to charge the state tax rate according to the state in which the customer lives. This should be added during the checkout process.
What are the rules for VAT on services from the UK?
The rules for VAT on services from the UK are slightly different to those within the EU. If you offer your services to customers in another EU country, then you may be required to charge VAT at 20% or 21%, depending on the type of goods or services.
There are special rules for VAT due on very very specific items or services. But if you fall under that category, you would know based on the information needed in your tax return after working with local tax authorities.
If you don’t want this additional cost added onto your invoices, you can register for a single market exemption number. This allows you to sell your goods and services without having to pay VAT.
Do I have to charge VAT on services to overseas customers?
Typically within the EU VAT is included in the final price for consumers. But for other countries, you will need to either add VAT or another form of tax depending on the country. For example, the US doesn’t charge VAT but uses a sales tax instead.
VAT is payable at the rate prevailing in the country where the customer belongs.
The amount of VAT you pay depends on the country of your customer, because that’s where the product will end up. So if you sell to someone in Italy, you need to pay Italian VAT rates.
Luckily, countries in the EU have a flat-rate. But knowing this is important for companies who operate outside of Europe and sell to customers within Europe. These companies need to be registered for a VAT number in at least one EU member state. VAT registration is not very difficult, and the process can be found on any state government website (gov.uk).
The VAT price depends on place of supply of services.
You might be wondering about the place of supply for services. This depends on where your customer is and where you provide the service.
If a business provides a digital service to an EU customer in their country, they will charge VAT at United Kingdom rates. However, if they provide a service to an EU customer outside of their country (such as by email or phone), they must charge import VAT at EU rates.
If your company performs both physical goods and digital services with customers in each region and/or country from which it receives revenue and pays wages, you can use a VAT Mini One Stop Shop (MOSS) registration so you don’t have to register for VAT in every member state that has access to MOSS services.
Do not try and avoid VAT by registering for VAT in another EU member state if you are doing business in the UK.
If you are trading with the UK and are registered for VAT in another EU member state, you can still make sales to UK consumers. However, if your business is based outside of the EU and has customers in both the US and the UK, then it is important to find out which country will be responsible for collecting sales tax from these customers.
You need to be sure that you are registered for VAT in the country where you are making a sale as only one member state can collect VAT on behalf of its residents. If your company has multiple offices or stores across Europe, then this means that every time someone makes a purchase from one location, they must pay different amounts depending on where they live – which is confusing for everyone involved!
You need to register for UK VAT to charge UK customers’ VAT.
If you’re based in the UK and selling to customers outside of the EU, you will need to register for UK VAT.
You need to be registered for UK VAT if:
- Your sales to non-EU countries are worth more than £85,000 per annum
- You make a lot of deliveries through various means of transport from your warehouse or office in the UK (i.e. ‘distance selling’)
If your business meets one or both of these criteria, it may be worth registering for UK VAT so that you can charge your customers’ VAT on their purchases from your website or e-commerce store.
You can apply to HMRC to be zero-rated, which means that you reclaim any VAT that you have paid on sales.
When you sell to customers in the UK and USA, you may be able to reclaim the VAT that you have paid on your purchases. This is known as a ‘reverse charge’.
To do this you must meet the following criteria:
- You must be registered for UK VAT (if you’re a UK business) or US Federal Excise Tax (if you’re a US business).
- Your business must be making taxable supplies of services or goods in both the UK and America. This means that if your business sells only in one country then it’s not eligible for zero rating and will pay full standard rates of VAT/Excise Tax. However, if your company makes any sales within both countries then it may qualify for partial relief from paying VAT/Excise Tax on certain types of supply depending on where those goods are sent from or delivered too.
Got VAT covered? Great! Now let’s see how your payments ecosystem is doing.
VAT is an important part of doing business in the EU, and it can be complex. The rules can change depending on where your business customer is located and what they’re buying.
Your customers don’t need to see the complexities of VAT. Using the right payment processor will help automate these tough processes so customers can keep swiping their cards and you can keep those sales numbers up.
Get in touch with us for a UK merchant account now and simplify your business.