VAT For Non-UK Companies: What You Need To Know

For many businesses setting up in the UK for the first time one of the elements of accounting they find most challenging is Value Added Tax (VAT). It’s a staple of the UK tax system and has many elements in common with General Sales Tax in Aus/NZ.  However, there are some peculiarities of the UK’s VAT regime that you must be aware if you plan to do business here.  

No sale 

Firstly – contrary to what you might think, VAT is not sales tax. “I have this conversation at least twice a week, because VAT works very differently to Australian GST and American sales tax,” explains Beth Lunn, a qualified accountant and VAT specialist working with Paul Beare so it is a completely different: and if they’ve already got in their head, because they’re from overseas, that they really struggle with the concept. 

So what I often have to explain to them is: it’s not your money; you are collecting it on behalf of the UK government. You collect it from your customers, you keep it in your bank account, and then you’re paying it out on your expenses. The net effect is you’re going to give the net balance over to the tax authorities.  

The price is right 

So, the second key point is that businesses must be aware of the need to price accordingly: “So when you price your product, you need to calculate your margin, the selling price and so on, and then you add your 20% VAT on,” Beth explains.  

Supply chain 

The third angle is the need to focus on your place of supply. In short, ‘place of supply’ is the place where you make a supply and where you may be charged and pay VAT. Companies also need to ensure that if they are operating in the UK and the place of supply of your service is in the UK, you charge and account for VAT according to UK VAT rules. If you’re in the UK and the place of supply of your service is in an EU country, you do not pay UK VAT. 

“Most services when supplied B2B are supplied where the customer belongs – meaning that VAT is due in the place where the customer belongs and typically accounted for under the reverse charge,” Beth says. “ However there are exceptions to this because the purpose of VAT is to tax as closely as possible the place where the goods or services are ‘consumed’.”  

Pay to play 

Fourth, it’s worth remembering that this isn’t a choice: unlike UK-based companies that only have to register for VAT once they hit an income threshold, non-UK companies must register for VAT straight away. And Beth’s work with a range of clients means she’s well aware of the pitfalls for those that fail to.  

“This definitely isn’t something they can ignore,” she says. “If you’re a one-off person where you couldn’t file the VAT return because you had a power cut, you’d left it till last minute, it’s just a slap on the wrist. Whereas before you’d automatically get a fine straight away. What it does do is it looks at those people that are repeatedly filing late or paying late and thumbs down tougher on them.” 

Real time 

Finally, Beth points out that, unlike many other taxes, VAT is levied and collected on a much tighter time scale. So, if you have collected £10k in VAT from customers in the first three months of the year, the bill will come due in April. In addition, the amount you owe is calculated on a rolling basis.  

I recently dealt with this, and had to explain that VAT period is calculated on a rolling basis. In practice that means that we submitted a return on February 15, then we’d go back to February 15 of the previous year to calculate the VAT liability. But if we then did a return a month later, we go back to March 15 last year. So it’s not your financial year you’re looking at, so that means you need to review your VAT it every month.

Ultimately, VAT is a fact of life for any non-UK company doing business here. But, while there is an admin burden involved, if you get your business set up right from the start then VAT becomes just a matter of routine.  

“We work with all kinds of businesses, and we know how VAT works back to front, so a good accountant is worth their weight in gold,” says Beth. “Like most things, if you get yourself organised, follow the rules and work with a good advisor, then tax needn’t be taxing.” 

If you plan to grow your business in the UK, we can help. Whether you’re in need of advice or support in this or any other area, Paul Beare Ltd is right here for all your needs. You can contact us for help from tax and payroll to accounting and banking.