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GUIDE TO HOW VAT WORKSFOR NON-EU IMPORTERSfrom titanlearning.
V A T
VAT is an indirect multi-stage sales tax on the consumption of goods and services
ALUE
DDED
AX
Export = Leaving
Exports & Imports are terms used for goodsleaving/entering the EU.
Import = Arriving
The EU VAT system is designed to be neutral with respect to most cross-border transactions.
So when goods enter from outside the EU, VAT is applied to make them equal with EU sourced goods.
Business A
Business B
Business C
VAT
VAT
Normally VAT applies to each stageof the production chain.
Business B
Business C
VAT
VAT
Each business charges VAT to it’scustomers...
CHARGES
CHARGES
Business A
Business B
Business C
VAT
VAT
... and each business can deductVAT that it is charged.
DEDUCTS
DEDUCTS
Business A
Business B
Business C
VAT
VAT DEDUCTS
DEDUCTS
CHARGES
CHARGES
Business A
Business B
Business C
Business A
If Business A is a US company and sends goods to the EU, things work slightly differently.
Let’s use the production chain for a chair as an example
Stage 1: Woodcutter Importing
A US Woodcutter cuts logs from the forest to sell to his customer - a UK Factory. The Factory has requested the Woodcutter be the importer of the goods to the UK.
The Woodcutter agrees and will import his logs as the ‘Importer of Record’ (IoR). The IoR is the legal entity responsible for the goods when they are presented to the UK Customs border.
Stage 1: Woodcutter Importing
When the goods are entered in to the UK, Import VAT is paid by the Importer of Record.
The Import VAT is charged by the UK Tax Authority (HMRC) in order to keep VAT neutral. Import VAT is designed to make imported goods brought in from outside the EU the same price as goods that are already in the UK.
It places both international and UK businesses on the same commercial footing.
Stage 1: Woodcutter Importing
In order for the Woodcutter to reclaim the Import VAT that he will incur, he will need to register for VAT in the UK.
Also, as he will be selling his goods to a UK business and he is theimporter, he will be subject to the mandatory ‘nil’ (£0) VAT registration threshold for non-UK businesses.
Stage 1: Woodcutter Importing
The woodcutter imports 3 shipments of logs in to the UK.The value of the shipments is calculated as the cost of production,plus insurance, plus transportation costs.
US Woodcutter’s Shipments - UK Imports
Total Net Taxable Costs £210
Total Import VAT paid to HMRC £42
Logs Shipment 1 £120 + 20% Import VAT
Logs Shipment 2 £30 + 20% Import VAT
Logs Shipment 3 £60 + 20% Import VAT
Stage 2: Woodcutter Selling
The woodcutter has imported his logs from the US andnow he can sell them to his customer - the UK sawmill.
Woodcutter’s Taxable Costs
Total Net Taxable Costs £210
Total Import VAT paid to HMRC £42
Logs Shipment 1 £120 + £24 Import VAT
Logs Shipment 2 £30 + £6 Import VAT
Logs Shipment 3 £60 + £12 Import VAT
Stage 2: Woodcutter Selling
Woodcutter’s Taxable Sales
Total Net Taxable Sales £350
Total Output VAT £70
40 Logs sold to the Factory £200 + £40 VAT
10 Logs sold to the Factory £50 + £10 VAT
20 Logs sold to the Factory £100 + £20 VAT
Stage 2: Woodcutter Selling
VAT Paid/Reclaimed on VAT Return
VAT Paid to HMRC £70
Total Import VAT Paid (Stage 1) £42
Total Import VAT Reclaimed (Stage 2) -£42
Total Output VAT To Pay (Stage 2) £70
Stage 2: Woodcutter Selling
In Stage 1, the woodcutter had to pay import VAT of £42 on his shipments of logs to the UK. With the correct import document evidence, he can reclaim the Import VAT of £42 on his VAT Return.
As the woodcutter has sold the logs to his customer (Stage 2), he must declare the £70 VAT he has charged to his customer to HMRC on his VAT Return. The woodcutter should pay the difference of £70 over to HMRC when he submits his VAT Return.
Stage 3: Factory Buying & Selling
The Factory buys logs from the woodcutter once thegoods are located in the UK. The Factory takes the logsand turns them into furniture to sell on to his customer- the Retailer.
Stage 3: Factory Buying & Selling
Factory’s Taxable Costs
Total Net Taxable Costs £350
Total Input VAT £70
40 Logs from Woodcutter £200 + £40 VAT
10 Logs from Woodcutter £50 + £10 VAT
20 Logs from Woodcutter £100 + £20 VAT
Stage 3: Factory Buying & Selling
Factory’s Taxable Sales
Total Net Taxable Sales £1,200
Total Output VAT £240
Furniture to Retailer £500 + £100 VAT
Furniture to Retailer £300 + £60 VAT
Furniture to Retailer £400 + £80 VAT
Stage 3: Factory Buying & Selling
The Factory can deduct the VAT on his taxable costs (£70)and must declare the Output VAT of £240.
The Factory must declare VAT of £170 on his VAT Return.
VAT Paid/Reclaimed on VAT Return
Total Input VAT Reclaimed -£70Total Output VAT to Pay £240
VAT Paid to HMRC £170
Stage 4: Retailer
A retailer buys wholesale furniture from the factory to sell on tothe consumer. The retailer is the last stage of the supply chain.
Stage 4: Retailer
Retailer’s Taxable Costs
Total Net Taxable Costs £1,200
Total Input VAT £240
Furniture from Factory £500 + £100 VAT
Furniture from Factory £300 + £60 VAT
Furniture from Factory £400 + £80 VAT
Stage 4: Retailer
Retailer’s Taxable Sales
Total Net Taxable Sales £2,300
Total Output VAT £460
Furniture to Consumer £1,000 + £200 VAT
Furniture to Consumer £550 + £110 VAT
Furniture to Consumer £750 + £150 VAT
Stage 4: Retailer
The retailer can deduct the VAT on his taxable costs (£240) and must declare the Output VAT of £460. The retailer mustdeclare VAT of £220 on his VAT Return to HMRC.
VAT Paid/Reclaimed on VAT Return
Total Input VAT Reclaimed -£240Total Output VAT to Pay £460
VAT Paid to HMRC £220
Stage 4: Retailer
The VAT charged by the retailer cannot be deducted by theconsumer as the VAT ‘sticks’ with the end consumer in the supply chain.
TAX AUTHORITY - HMRC
VAT Collected from Businesses:
Woodcutter £70Furniture Factory £170Furniture Retailer £220
Total VAT Collected £4601
TOTAL REMITTED VAT
1 The total VAT collected matches the VAT charged to the end consumer
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