According to the Great British Export Report from FedEx, 53% of small businesses in the UK now export their goods or services, and 72% believe their export revenues will increase in the next five years.
FedEx's research suggests that the overwhelming majority (96%) of British SMEs who do export are exporting into other EU countries. France is the number one export market, with 57% of British SMEs exporting there, followed by Germany at 49% and Spain at 37%. The report indicated that the average British SME exports £553,000 a year to Europe and imports £535,000.
This is good news for small businesses in the UK that may have global (or at least continental) ambitions, but what are the tax implications of exporting to other EU countries, or importing from them? How straightforward is VAT across EU borders?
VAT-registered businesses in the UK must record any exports to and imports from other EU countries on their quarterly VAT returns, and if the business’s customers are also VAT-registered in their respective EU countries then the EC Sales List should also be submitted to HMRC on a monthly or quarterly basis.
Businesses that import more than £1.5 million worth of goods per year from other EU countries, or export more than £250,000, must also complete an additional form, the Intrastat Supplementary Declaration.
At this stage, it’s worth pointing out that we’ve been (deliberately) using the wrong terminology when we talk of ‘imports’ and ‘exports’ (sorry about that). In fact, small businesses in the UK will find that their VAT returns and EC Sales Lists actually refer to ‘acquisitions’ and ‘dispatches’ for EU trade, rather than imports and exports.
Although imports and exports are still the terms most commonly used by SMEs trading within the EU, since the introduction of the EU Single Market goods leaving the UK to go to other EU countries haven’t been officially classed as exports at all, and are instead referred to as ‘dispatches’ or ‘removals’. Similarly, goods arriving in the UK from other EU countries are referred to as ‘acquisitions’ rather than imports. The taxman loves complexity!
Who pays the VAT on goods?
Semantics aside, the question remains: who pays the VAT on these ‘dispatches’ and ‘acquisitions’?
Assuming both businesses are VAT-registered in their respective EU states, and the transaction is for physical goods (rather than services), VAT is paid by the customer (also known as the ‘acquirer’) at the rate of VAT that applies in their own country, irrespective of the VAT rate the supplier (the ‘dispatcher’) would normally charge its domestic customers.
The dispatcher will need to include the acquirer’s VAT registration number on its supplier invoice, and will also need to be able to provide written evidence that the goods have been sent to the other EU country.
If a VAT-registered business is selling to a business in another EU country that is not VAT-registered, a different VAT calculation applies (of course). In those cases the supplier normally charges VAT on its dispatches at the appropriate rate of VAT in its own country, unless the supplier is directly responsible for delivering the goods to the customer and the value of the order exceeds the distance selling threshold, in which case the rate of VAT in the customer’s country applies (still with us?).
Who pays the VAT on services?
Accounting for VAT on the supply of services to customers in other EU countries is slightly more complicated (believe it or believe it not), and hinges on an assessment of the ‘place of supply’ ie in which EU country the service has been supplied to the customer.
Generally speaking, if a small business in the UK is supplying services to a business customer in another EU country then the place of supply is the customer’s country, and if the services are being supplied to a non-business customer then the place of supply is the supplier’s country.
If the supplier is based in the UK and the place of supply of their service is in the UK, the supplier charges and accounts for VAT according to the UK’s VAT rules. On the other hand, if the supplier is based in the UK but their place of supply is in another EU country then VAT is not charged in the UK, although the supplier may have to register for VAT in their place of supply (ie in the other EU country).