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, depending on the nature of the service supplied. This is a complex area, but broadly, assuming the supplier belongs in the UK and the customer belongs in the States, UK VAT will need to be charged on most services unless one of the following exceptions applies.
UK VAT does not need to be charged on most services related to a live event or physical activity carried out in the USA. This includes cultural, artistic, sporting, scientific, educational, training, entertainment, exhibition and valuation services.
UK VAT does not need to be charged on services relating to land or property situated in the USA. This includes estate agency, conveyancing, architects, surveying, construction, property maintenance, hotel accommodation, defined exhibition stands, and property management services.
UK VAT does not need to be charged on passenger transport carried out in the USA.
UK VAT does not need to be charged on most ‘intellectual’ services supplied to a customer who belongs in the USA. This includes copyright, royalties, licences, advertising, consultants, engineers, lawyers, accountants, banking and insurance. If the service relates to land or property situated in the UK, VAT still needs to be charged.
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.