VAT is a tax levied within the European Union (EU) only. It is, therefore, necessary to distinguish imports and exports from outside the EU from transactions within the EU
Imports from outside the EU Goods
VAT is charged on goods imported from outside the EU as if it were a customs duty. It is normally collected directly from the importer at the place of importation, such as a port or airport.
- If the imported goods are immediately placed in a bonded warehouse or free zone, then VAT is postponed until the goods are removed from the warehouse or zone.
- Approved traders can pay all of their VAT on imports through the duty deferment system.
- The VAT paid on importation can be reclaimed as input VAT on the VAT return for the period during which the goods were imported.
- The net effect of importing goods is, therefore, the same as if the goods were bought within the UK.
The treatment of services purchased from outside the EU is generally the same as the treatment of services purchased from within the EU and is discussed later in this article.
Exports outside the EU
The export of goods outside the EU is a zero-rated supply. This is a favorable treatment for the exporter as it allows them to recover input tax. It also means the customer is not charged VAT.
The supply of services outside the EU is outside the scope of VAT.
Transactions within the EU Goods
The following table summarises the two situations which can occur when trading between EU countries.
VAT on purchases from within the EU and outside the EU is collected via different systems. However, both leave the UK business in the same overall financial position
Supply of service
For services, VAT is generally charged at the place of supply.
The place of supply varies depending on whether the customer is a business or non-business customer.
These rules can be applied to a UK business as follows: