VAT between the UK and the US
The UK and the US have an important trade relationship. However, due to completely different tax systems, the process can be quite confusing.
This article explores the VAT process when exporting or importing goods and services between the UK and the US.
The United States has a complicated system for sales tax. It’s charged at the state and local level instead of the federal level, meaning that the tax rates vary significantly between states and even cities and counties within states. In 2021, the sales tax rates vary between 0% and 10.25%.
In the US, when you pay for a good or service, the state and local sales tax are combined creating a “Combined Tax Rate”. The cities with the highest combined state and local tax rates are Chicago, Illinois, and Glendale/Long Beach, California at 10.25%. Anchorage, Alaska has no state or local tax.
The United Kingdom uses a sales tax known as “Value Added Tax” or “VAT”. Any VAT-registered business must apply VAT to their products or services, except in certain circumstances.
Compared to the United States, the UK VAT rates are simple and charged the same throughout the UK:
20% standard rate for most goods and services
5% reduced rate for some goods and services (e.g. electricity, children’s car seat, and smoking cessation products)
0% zero-rated goods and services (e.g. most food & drink products, children’s clothes, and flights)
Any UK business that has a VAT taxable turnover over £85,000 must register for VAT with HMRC and start charging VAT on their products or services. You can also voluntarily register for VAT if your company is below the threshold and it would benefit your business.
The majority of goods exported to the US can be zero-rated for VAT. In other words, you don’t need to charge VAT on the exported goods or the extra charges such as shipping and delivery.
You will, however, need to keep sufficient evidence of the export, such as the invoice, the delivery note, a bank statement proving the purchase or a customs document. This proof should be kept for at least 7 years.
You’ll also need to report the net value of the sale on your VAT return in box 6, which includes the total value of sales and all other outputs excluding VAT.
If your business is on the VAT Flat Rate Scheme, then this export will be included in the turnover amount on which the flat rate is paid. Therefore, if you do several exports to the US, it may be beneficial to not be on the Flat Rate Scheme. I would suggest speaking to your accountant if you think this may affect your business.
If you’re importing goods from the USA, there’s no requirement for VAT registered businesses to account for VAT.
If you’re importing something from the US, the US sales tax will not be added, but rather, the UK tax rate (20%) will be paid on import. The UK VAT registered business will then be able to reclaim that amount of VAT on their VAT return in box 4 (VAT reclaimed in this period).
Essentially, this process cancels out the tax. US taxes are not charged, but the importer pays UK VAT on arrival and then reclaims the amount on their VAT return.
The tax on services between the UK and the US are determined by the place of supply. The general place of supply rule is:
For business-to-business (B2B) service sales, the place of supply is the country where the customer (receiving business) belongs.
For business-to-customer (B2C) service sales, the place of supply is the country where the supplier (sending business) belongs.
There are only a few exceptions to the place of supply rule, including:
The services are directly related to a specific place (e.g. hotel booking, restaurant, construction, concert tickets, etc.).
Certain services provided to non-businesses: Usually, the B2C transactions would have a place of supply where the supplier is located. However, services such as advertising, consultants, lawyers, accountants, and electronically supplied services will have a place of supply of the customer.
You can see a full list of special rules to certain services on the UK Government website.
Under the general rule, if your UK business is providing services to the US and the place of supply is the US, then this transaction will be outside the scope of VAT. You will not need to charge VAT and can mark this on box 6 of your VAT return.
If your UK business is providing services to the US and the place of supply is the UK, then you’ll need to account for VAT and charge it at the correct rate.
The VAT process on services sold between the UK and the US can be quite complex. Using the rules in the previous section, we’ll outline a few examples.
Your UK VAT-registered business provides advertising services to individuals (non-businesses), as well as businesses located in the US. Both types of transactions would have a place of supply of the customer and you will not have to charge VAT.
Your UK VAT-registered business is providing construction services for a specific place to a US business. You will not need to charge VAT.
Your UK VAT-registered business is selling services to a US individual (non-business) that is not considered one of the special exception services. The place of supply would be the UK, and you would charge VAT.