Startups operating in the UK need to understand the taxman laws especially when it comes to VAT. You should get your business on the good books of the taxman from the onset. What is VAT and which businesses need to pay it? Do US companies shipping to the UK have to pay VAT?
Businesses in the UK are familiar with VAT. This is a tax that is charged on most goods and services provided by businesses registered in the UK. VAT can also be charged on goods and services originating from other European Union (EU) countries or countries outside the EU.
VAT charges may apply to both businesses and non-business consumers.
- Business customers e.g. a shoe manufacturer will add VAT to the prices they charge a shoe store.
- Non-business customers i.e. “consumers” e.g. a barber includes VAT on the prices he charges customers.
When operating a business in the UK, you need to know the goods and services that you should charge VAT.
VAT-registered businesses will in most cases include VAT in the prices of their goods or services. Entrepreneurs can also reclaim the VAT they pay for goods or services bought for their businesses.
Businesses that are not VAT-registered cannot reclaim the VAT they pay for goods or services.
Supplies Exempted from VAT
Businesses do not have to pay or account for VAT for all goods and services. Here is an overview of situations where you do not have to pay VAT:
a) Free goods
If you give out items not exceeding £50 to the same person over any 12-month period, you do not have to account for VAT for them. These items are classified as business gifts and are VAT-exempted. Read more about how VAT rules apply to business gifts.
b) Free Samples
If you are offering prospects free samples of your products, you do not have to pay VAT for them. The samples must be given to promote sales and provided in quantities consistent for the purpose.
c) Free Services
If your business offers free services, you do not have to account for VAT. For your business to be classified as a “free service”, you must not be receiving any payment, goods or services.
Read more about standard, zero, reduced and exempt VAT rates.
Frequently Asked Questions
What is “Distance Selling”?
If your business is registered outside the UK and you sell goods or services to customers who are not VAT-registered or don’t have to be registered, you are “distance selling”. If you are selling to VAT-registered businesses, you are not “distance selling” even if your business is registered in another EU country. More information about distance selling.
Do businesses in EU selling to UK customers pay VAT?
If you are a VAT-registered business in the EU and are “distance selling”, you have to register for a UK VAT if your sales exceed £70,000 a year. Most Internet and mail order catalogue businesses fall here. Read more about distance selling to the UK from other EU countries.
How do you register for a UK VAT?
Distance sellers wishing to register for a UK VAT have to fill in form VAT 1A ‘Application for Registration – Distance Selling’. You can get the form online but have to send it through mail to the HMRC for processing.
Do UK businesses pay VAT when selling to EU consumers?
The VAT rules for different EU countries vary. The European Economic Commission website has information on matters related to business taxes in different EU countries.
Do UK businesses pay VAT when selling to Non-EU consumers?
If you sell goods/services outside the UK, VAT may or may not apply. Generally, you can zero-rate VAT when selling to consumers in the US and other countries outside the European Union (EU). VAT can also be zero-rated for VAT-registered consumers in other EU countries. Get more information on the HMRC guide on goods/service export.
Do US Companies need to pay VAT?
Goods/services from businesses in the US and other non-EU countries do not fall under “distance selling”. Therefore, these businesses do not have to pay VAT. However, the UK customer may have to pay import tax or duty for certain goods. The tax rules for goods/services outside the UK and EU are covered by the rules in your own country.
HMRC Website – Introduction to VAT.
VAT Guides - What entrepreneurs should know about VAT.
HM Revenue& Customs – Official VAT website and resource.
HSBC Finance – Understand VAT and duty on imports and exports.