The United Kingdom and the United States have a significant business partnership. However, the method of calculating this can be very complicated due to them having entirely different tax systems. In this article, we shall clarify the process of calculating VAT when exporting or importing goods or services between the United Kingdom and the United States.
Tax In The UK
The United Kingdom imposes a sales tax known as ‘Value Added Tax’ or ‘VAT.’ Any registered VAT company must apply VAT on its goods or services, except in some circumstances.
Compared to the United States, the United Kingdoms VAT rates are easy and consistent throughout the United Kingdom:
- A standard rate of 20% for most goods and services
- 5 percent reduced rate for some goods and services (e.g. electricity, child car seats and smoking cessation products)
- 0 percent zero-rated goods and services (e.g. most food & drink items, children’s clothing and flights)
Any UK company that has a taxable VAT turnover of more than £85k needs to register to pay the VAT with HMRC and start charging VAT on its goods or services. You may also apply for VAT on a voluntary basis if your company is below the threshold and your corporation will benefit from it.
Tax In The US
The United States has a complex sales tax scheme. It is levied by the state and local level instead of at the federal level, which means that tax rates differ greatly between states and also between cities and counties within states. Sales tax rates in 2020 range from 0 to 10.25%.
In the US, when you pay for goods or services, the state and local sales tax combine to create a “Combined Tax Rate.” Chicago, Illinois, and Glendale and Long Beach have the highest combined state and local tax rates at 10.25%. Anchorage in Alaska does not have a state or local levy.
How To Calculate VAT Charges on Imports To The UK?
Today, we’ll show you how you can measure the overall duty and tax that you will be paying for importing goods from a country outside the European Union to the United Kingdom.
Importing Goods Into The UK From EC Member States
In general, goods imported from the EU should already be marked as “duty paid” because they are in free circulation within the EU until at least the 31st December 2020 and you will not be charged any fee! This means that if you find a product in Spain or Greece that you want to buy, and you send it back to the UK, it’s easy to arrange the shipment.
You will pay tax (like our VAT) on the buying price of the commodity in the EU country from which you buy it. The only exception here is that if you are a registered VAT company in the United Kingdom, you can ask the European company to eliminate the VAT element and pay for it on your VAT return.
After the UK leaves the EU, it’s unclear whether there will be charged imposed on imports from the EU to the UK. This will be made clear during Brexit negotiations or upon the UK leaving the EU without a trade deal.
Importing Goods Into The UK From Countries Outside of The European Union
When you buy goods from overseas countries for distribution to the United Kingdom, the senders of the items should complete a commercial invoice and send it in the shipment. The commercial invoice shall display the United Kingdom customs value of the product(s) entering the United Kingdom along with the overall cost of shipping and insurance. This cumulative amount of commodity value, shipping cost and shipping insurance would be considered as the value of your products. One important thing to note is that the sender of the products does NOT charge you any local sales tax (similar to VAT) on your order. This is because you will pay VAT on the entry of products into the United Kingdom to HMRC customs.
Now that you have the overall value of the products, including shipping and insurance, it should be easy to calculate the VAT part.
The value of VAT actually stands at 20 percent, so the amount of VAT paid at a total value of £1,000 is going to be GBP 200. If the value of the product plus delivery and insurance costs is less than £ 15 (£36 for gifts), no VAT is due. If you are a registered VAT company, you will be entitled to demand the VAT part back on your VAT return (using the form C79).
The next step is to figure out how much duty you will be paying (it is worth remembering that HMRC customs will also apply 20% of VAT to the duty charges).
In order to calculate duty, you must first “Classify” your products using the UK TRADE TARIFF.
The Trade Tariff is a method you can use to find the “Harmonized” code for your product(s) (sometimes called the “Commodity Code”).
The Harmonised Coding System (HS Coding) is a globally standardised system used by all countries to recognise and classify just about every product ever developed and in circulation!
This ensures that regardless of which country the goods move to and from, the HS-CODE would ensure that the goods are handled properly when they pass in and out of the customs authorities.
To use the Trade Tariff, first ensure that you set the country from which you are importing. This is important because the United Kingdom has formed trade agreements with several countries that can minimise duties.
You now need to select the most suitable headings and sub-headings for the product you are submitting before the system sends you a final HS code and a report of the duty.
Services VAT Between The UK And The US
Tax on services between the United Kingdom and the United States shall be decided by the place of supply. The general position of supply law is as follows:
- In the case of business-to-business (B2B) service transactions, the place of supply in the country in which the consumer belongs.
- For B2C service sales, the place of supply in the country in which the supplier (sending business) is based.
There are only a few exceptions to the rule on the place of supply, including:
Services are specifically connected to a particular location ( e.g. hotel booking, restaurant, development, concert tickets, etc.)
Such services are offered to non-EU individuals / non-businesses.
Typically, a B2C transaction will have a place of supply where the supplier is located. However, services such as ads, consultants, attorneys, accountants and electronically provided services may have the customer’s position of supply.
You will see a full list of special regulations for such programmes on the website of the United Kingdom Government.
Under the general rule, if the UK company offers services to the US and the place of supply in the US, this transaction would be beyond the scope of VAT. You will not be allowed to charge VAT and will indicate this in box 6 of your VAT return.
If your UK company offers services to the United States and the place of supply in the United Kingdom, you would need to pay for VAT and charge it at the usual rate.
VAT on services – a place of supply examples
The VAT procedure on services offered between the United Kingdom and the United States can be very complex. By using the rules in the previous section, I will give you a few examples.
Your UK VAT-registered company offers advertisement services to individuals (non-companies) and businesses based in the US. Both forms of transactions will provide a place of supply for the customer, and you would not have to charge VAT.
Your UK VAT-registered company offers construction services for a particular location for a US company. You’re not going to need to charge VAT.
Your UK VAT-registered company is selling services to a US person (non-business) who is not considered to be one of the special exemption services. The place of supply will be the United Kingdom, and you would be paying VAT.
Exporting Goods Between The UK And The USA
The majority of products shipped to the United States can be tax-free. In other words, you do not need to charge VAT on the exported products or any other charges such as shipping and delivery.
However, you would need to hold ample proof of the sale, such as the invoice, the shipping note, the bank statement of the transaction or the customs record. This evidence should be held for at least seven years.
You will also need to record the net value of sales on your VAT return in box 6, which contains the gross value of sales and all other outputs except VAT.
If your company is protected by the VAT flat rate system, this export will be included in the turnover sum at which the flat rate is charged. Therefore, if you export to the US many times, it will be advantageous not to have a flat-rate scheme. I would recommend that you talk to your accountant if you think that would have an effect on your company.
Importing Goods Between The USA & The UK
If you are importing products from the United States, there is no obligation for registered VAT companies to account for VAT.
If you buy anything from the United States, the united states sales tax will not be applied, but the United kingdom tax rate (20 percent) will be charged on import. The UK registered VAT company will then be able to recover the amount of VAT on its VAT return in box 4 (VAT refunded during this period).
Essentially, the tax is offset by this process. US taxes are not paid, but the importer pays UK VAT on arrival and then recovers the balance on their VAT return.