What is VAT? How VAT in Europe differs from VAT in the UK

A key feature of European taxation, particularly UK tax laws, are straightforward rules regulating tax rates and amounts to be paid. Second characteristic is strict treatment of non-payers. At the same time, UK laws offer opportunities to legally reduce tax burden on a business.

Almost all companies trading in Europe, as well as their partners, suppliers and customers, deal with VAT in their day-to-day business. However, unusual terminology, different rules of distributing VAT among counteragents can be hard to understand for a businessman. To get your head around how it all works, you might need to talk to a European tax expert.

Having said that, VAT rules in Europe are available to public; they are written down in official documents of the UK and EU.

In our article we will talk about a European value-added tax and for the sake of it we will refer to it as VAT.

What is VAT?

VAT is paid by the end customer; however, tax contributions are paid to the government long before the sale. A seller has already paid a part of the tax by buying goods and services (with VAT) that they need to do their job. Therefore, a VAT amount received by a seller is not paid to the government in full, but after deducting VAT amounts included in the price of goods and services they bought from other suppliers.

VAT in the European Union

Lowest and highest rates, legal terms, key VAT principals are regulated in the EU by a 2006 directive ‘The EU’s common system of value added tax’. At the same time, national governments can set their own VAT rates (within the limits prescribed in the directive) and decide on other matters.

Terminology

The said directive explains a concept of a taxable person, if speaking about VAT, or a taxpayer, i.e. a company, partnership or an individual purchasing goods and services in the course of business.

If you are buying goods for personal (non-commercial use), you cannot be considered a taxpayer for VAT purposes. Most retail buyers fall under this category.

VAT registration in Europe

VAT registration can be either voluntary or mandatory, the latter being when a company’s turnover reaches a certain threshold.

What trading activities are subject to VAT in the EU?

Taxable transactions in the European Union include:

1. Sale of goods.
2. Purchase of goods within the EU.
3. Import of goods.
4. Supply of services.

Transactions for the supply of services are divided into 2 types:

1. B2B (business to business) when there are two taxable persons and a buyer acquires a service for commercial use.
2. B2C (business to consumer) when a seller is a VAT taxpayer and a buyer not.

We need those categories to identify a place of taxation correctly. It is important to know where a service is going to be supplied and where VAT will be charged.

• If there are two taxable persons in a deal (B2B), VAT is charged at the place of the customer.
• If a service is provided by a business entity to a non-taxable individual (B2C), VAT is charged at the place of the supplier.

There are also exemptions to the rules stipulated in the EU Directive. For example, if the supply of goods has anything to do with real estate, a place of taxation is the location of real estate.

VAT in the UK

Standard VAT rate in the UK is 20%. However, a reduced VAT rate applies to some goods and services, either permanently or as a temporary measure to support UK businesses. During COVID-19 pandemic, for six months, VAT for hospitality, holiday accommodation and attractions was reduced to 5%.

In normal times, 5% VAT is charged on the following goods and services:

• Children’s car seats, booster seats and booster cushions and other protective equipment.
• Sanitary protection products.
• Power, utilities and heating for domestic and residential use or for non-business use by a charity.
• Energy-saving materials and technologies used in residential buildings and dwellings.
• Converting existing premises by increasing the number of dwellings within the building or renovating a dwelling that has been empty for at least 2 years.

Some goods and services are exempt from VAT in the UK. You cannot include exempt goods and services in your taxable turnover for VAT purposes. If you buy these for commercial use, you cannot subtract them when preparing a VAT return. What goods and services are VAT-exempt?

1. Insurance and financial
2. Physical education and sports activities.
3. Care or medical treatment.
4. Education and vocational training.
5. Charitable fundraising
6. Public bodies membership
7. Sale, lease or let of commercial land and buildings (you can waive this exemption).

Please bear in mind that VAT-exempt goods and services are not the same as zero-rated. There are a lot of categories where VAT on some goods and services is 0% while others are standard-rated. Here are a couple of examples for you:

• Equipment, materials and tools for disabled people.
• Water supply to private households.
• Aircraft repair and maintenance
• Sale of books, newspapers, magazines, brochures, maps and charts.
• Children’s clothes and footwear.

We shall talk about the food and drink category separately. Healthy and unprocessed foodstuffs are zero-rated while fast food, hot takeaways, food served on premises, alcoholic drinks, crisps, savoury snacks are charged at 20%.

All goods and services exported from the UK and outside the EU or sent to someone registered in the EU, can be zero-rated if certain conditions are met.

Mandatory VAT registration in the UK

If your taxable turnover exceeds £85,000, your business must register for VAT with the HM Revenue and Customs.

Even if your turnover is less than £85,000, you can still register your company for VAT, provided the goods and services you supply are not VAT-exempt.

When your application to register is approved, you will be sent a VAT certificate that includes:

• VAT number assigned to your company.
• Deadline to submit your first VAT return and payment.

A date from which a company is considered registered for VAT is the date when your turnover reaches the threshold or when you make a voluntary application to the HMRC.

As the UK is interested in attracting investments and developing small and medium businesses, most companies, after reaching the necessary threshold and registering for VAT, start working in a special software where they can:

• Account for VAT expenses.
• Charge the right amount of VAT.
• File returns and make payments on time.

If you want to learn more about incorporating a business in Great Britain, types of companies and how to run a business here, our article about starting a business in the UK will be very useful.

VAT rules between the UK and EU after Brexit

Further import and export relations between the UK and continental Europe will depend on all agreements made between these countries.

In summer 2019, UK tax authorities made a statement on how they see trade relations with the rest of Europe in the short term. They confirmed that current rules, including identifying the place of VAT taxation, will stay unchanged.

However, unless a VAT intergovernmental agreement is signed very soon, after the transition period, the UK would have to charge VAT on goods and services sold outside the country, including to the European Union. Besides, EU imports will be standard-rated and subject to customs duties. The same is expected to be mirrored from the EU side.

Qualified experts at Imperial & Legal have years of experience and stay up to date with latest developments and changes; they can provide expert advice on any matters related to running a business in the UK from incorporating a company to tax payments to accounting. We will offer a tailored solution and provide full support in these and other matters related to relocation and development of a business in Europe.