VAT between the UK and the USA
The United States of America is an important trading partner and export market for the UK, but its federal system of taxation and lack of a comparable system of VAT to the UK can cause confusion for business carried out between the 2 countries. Do you need to charge VAT when selling to the States? This post outlines the main issues as they apply to a small UK business.
The UK comprises England, Wales, Scotland, Northern Ireland, and (generally for VAT purposes) the Isle of Man but not the Channel Islands.
Exporting goods to the USA
Most goods exported to the States can be zero-rated for UK VAT purposes (that is, VAT does not need to be added), as long as documentary evidence of the export is kept. Any extra charges made for freight, shipping, postage or delivery are also zero-rated.
Even where VAT is not being charged, the net value of the sale must still be reported on the UK VAT return, in box 6. It should not be included on the EC Sales List, nor on an Intrastat return if the business is required to make one.
If the UK business accounts for VAT on the Flat Rate Scheme, it must include the value of the export in the turnover on which the Flat Rate VAT is paid. This may mean that the business is better off not being on the Flat Rate Scheme.
Importing goods from the USA
There is no requirement for a VAT-registered business to account for VAT on imports into the UK from the USA in the same way as from other EC states.
The United States has a system of sales tax that is charged at the state level rather than at the federal level. Most states choose to charge it, and the rate varies considerably, from 1% to 16%. However, this should not be added on goods that are exported from the USA into the UK. Instead, UK VAT at 20% is normally paid on import, and a UK VAT-registered business can reclaim that same amount from HMRC by including it as input VAT in box 4 of their regular VAT return, subject to the normal rules about recovering input tax.
VAT on services
UK VAT may need to be charged on services performed in the USA or to clients based there, depending on the type of service supplied. This is a complex area, and there are specific rules for the following services:
- Services relating to land or property
- Services of short-term hire of means of transport
- Services involving physical performance and events. For example artistic, cultural, education and training, sporting, entertainment services, exhibitions, conferences, meetings
- Supplies of admission to artistic, cultural, education and training, sporting, entertainment events, exhibitions, conferences and meetings and services related to admissions
- Ancillary transport, valuation of/work on goods
- Restaurant and catering services
- Passenger transport
- Freight transport
- Intermediary services (generally agencies or brokers working for a commission)
- Training services supplied to overseas governments
Everything else is covered by a general rule. This includes copyright, royalties, licences, other intellectual rights, advertising, consultants, engineers, lawyers, accountants, data processing, written translation, computer programming, software maintenance, web design, sound engineers and technicians, the supply of staff, banking and insurance.
Under the general rule, if the service is being supplied to a consumer (rather than a business) in the USA, it will be subject to UK VAT. This means that UK VAT must be charged at the usual UK rate, either standard rate, reduced rate, zero-rated or exempt. The UK business will account for VAT in the usual way.
If the service under the general rule is being supplied to a business customer in the USA, it will be outside the scope of UK VAT (UK VAT is not charged). Some evidence of the business purpose should be obtained.
If the UK business accounts for VAT on the Flat Rate Scheme, it does not need to pay Flat Rate VAT on the value of services which are not subject to UK VAT due to them being performed in the USA or to a customer based there.
Services relating to land or property include estate agency, conveyancing, architects, surveying, construction, property maintenance and repair work, hotel accommodation (unless a tour operator), defined exhibition stands, and property management services. If the property is in the UK, the service is liable to UK VAT regardless of the status or location of the customer. If the property is in the USA, the service is outside the scope of UK VAT regardless of the status or location of the customer.
In all cases, it is important to look at the precise nature of the underlying service being provided. A business cannot turn one type of service into another by simply changing the wording on the invoice.
Additional services rules
The UK business is still able to reclaim any UK VAT on expenses which it incurs in providing a service which is deemed to be outside the UK, providing that the service would be taxable if it was made in the UK, and subject to the normal rules about reclaiming input VAT.
If a VAT-registered UK business receives a service from an American supplier, and the place of the service according to the above rules is in the UK, the UK business may need to ‘reverse charge’ that service (see section 16, VAT Notice 741). If the UK business is not registered for VAT, and the service is ‘intangible’ or ‘intellectual’, the value of that service will be included in the turnover of that business in determining whether it needs to register for UK VAT.
Please note that we are no longer taking on any new overseas clients or UK clients with significant overseas interests, and we do not give free advice by email or telephone.