Do I Have to Charge VAT to Overseas Customers?

Value Added Tax (VAT) is a consumption tax applied to most goods and services sold within a country. Businesses registered for VAT generally add this tax to the price of their products or services and then remit the collected amounts to the tax authorities. In a domestic setting, this process is relatively straightforward, with the tax applied at each stage of the supply chain.

The application of VAT becomes more intricate when businesses engage with customers located outside of their home country. Different rules apply when goods are exported or services are provided across international borders, often leading to a different VAT treatment compared to domestic sales. This article will explore UK VAT regulations concerning sales made to overseas customers, distinguishing between the supply of goods and services.

VAT Rules for Exported Goods

When a business in the United Kingdom sells and ships physical goods to a customer located outside the UK, these sales can often be “zero-rated” for VAT purposes. Zero-rating means that while the supply is still considered a taxable transaction for VAT, the VAT rate applied is 0%. This effectively means no VAT is charged to the overseas customer at the point of sale.

For goods to qualify for zero-rating, they must physically leave the UK. The supplier must ensure the goods are genuinely exported and retain sufficient evidence of their departure.

HMRC guidance stipulates that businesses must obtain specific export evidence within three months from the date of supply. Acceptable evidence includes commercial invoices, transport documents such as bills of lading or air waybills, and proof of export from customs systems. Without adequate evidence, HMRC may consider the supply a domestic sale and require the supplier to account for the standard rate of VAT.

Export responsibility and evidence gathering depend on the Incoterms used. If the seller handles delivery and export clearance, they must obtain all necessary documentation. If the buyer arranges export, the seller still needs satisfactory evidence that the goods left the UK to justify zero-rating.

VAT Rules for Services Provided Overseas

The VAT treatment of services provided to overseas customers differs significantly from that of goods, as services cannot be physically exported similarly. Instead, the VAT rules for services are determined by “place of supply” rules, identifying where a service is consumed for tax purposes. This distinction is important because if the place of supply is outside the UK, then UK VAT is not charged.

Place of supply rules vary for business (B2B) and private consumer (B2C) services. For most B2B services, the place of supply is generally where the customer belongs. If a UK business provides services to a business customer located outside the UK, UK VAT does not apply, and the service is considered “outside the scope” of UK VAT. The overseas business customer may account for VAT in their country via the reverse charge mechanism.

For B2C services, the general rule is that the place of supply is where the supplier belongs, i.e., the UK business. Consequently, UK VAT would be charged on services provided to private consumers located outside the UK. However, there are exceptions to this general B2C rule, which shift the place of supply away from the UK.

An exception covers electronically supplied services (ESS), such as software, digital content, or online subscriptions, provided to B2C customers. For these services, the place of supply is where the customer is located. This rule means a UK business selling digital services to a private consumer abroad would not charge UK VAT but might need to register and account for VAT in the customer’s country.

Another exception applies to services related to land, like architectural or property management services. The place of supply for these services is always where the land itself is located. Therefore, a UK architect designing a building in another country would not charge UK VAT on those services.

Services related to cultural, artistic, sporting, scientific, educational, or entertainment activities, including ancillary services, are supplied where the activity physically takes place. If a UK performer gives a concert abroad for private consumers, the place of supply is where the concert occurs, and UK VAT is not charged. Understanding these place of supply rules is important for determining the correct VAT treatment of international service supplies.

Evidencing Overseas Supplies

Accurate and comprehensive records are essential for businesses supplying goods or services overseas to demonstrate VAT compliance. These records prove to tax authorities, like HMRC, that the VAT treatment (e.g., zero-rating or out-of-scope) was correct. The absence of proper evidence can lead to penalties, including demands for unpaid VAT, even if the goods or services genuinely left the UK.

For exported goods, businesses must gather specific evidence to substantiate zero-rating. This often involves obtaining commercial invoices detailing goods, quantity, and value, along with transport documents (e.g., bill of lading, air waybill, consignment note). Additional evidence may include customs declarations, import duty payment proof, or signed delivery notes from the overseas customer. HMRC requires at least two independent pieces of evidence to confirm the physical export of goods from the UK.

When providing services overseas, evidence focuses on confirming the customer’s status (business or consumer), location, and service nature. This includes retaining copies of contracts or agreements with the overseas customer, clearly stating services and terms. Records demonstrating the customer’s business status, like their VAT registration number, are particularly important for B2B supplies.

Businesses should keep comprehensive records of communications with overseas customers, including emails and correspondence, that corroborate service details and delivery. Payment records, like bank statements from international accounts, also contribute to the body of evidence. Maintaining these detailed and timely records is a fundamental requirement for justifying the VAT treatment of international transactions and avoiding potential assessments during a tax audit.