When Do VAT-Registered Businesses Charge 0% VAT?
If you're a VAT-registered business in the UK (accrual or cash basis VAT registration), you might be wondering when you can charge 0% VAT on your goods and services.
Let's break it down so you can get a handle on when you can apply this zero-rated VAT and how it works.
Zero-Rated VAT
Zero-rated VAT means you charge 0% VAT on certain goods and services, but you can still reclaim the VAT on your related purchases.
Here are some common scenarios where you can charge 0% VAT:
Food and Drink: Most food and drink for human consumption is zero-rated, except for items like catering, alcoholic drinks, confectionery, crisps and savory snacks, hot food, sports drinks, hot takeaways, ice cream, soft drinks, and mineral water.
Books and Publications: Printed books, newspapers, and magazines are zero-rated.
Children's Clothing and Footwear: Clothing and footwear designed for children are zero-rated.
Exports: Goods exported outside the UK are zero-rated, subject to certain conditions.
Certain Health and Medical Supplies: Some health and medical supplies are zero-rated.
Exporting Goods and Services
When it comes to exporting goods and services, the VAT treatment can vary. Let's take a closer look at how it works, using the EU as an example.
Exporting Goods
When exporting goods from the UK to Europe, you can apply a 0% VAT rate, provided certain conditions are met. This means you don't charge VAT on the goods you export, but you must ensure you have the necessary evidence to prove the goods have left the UK. Here are some key points:
Proof of Export: You must obtain and keep evidence that the goods have been exported. This can include commercial transport documents, customs export declarations, or evidence of receipt of goods abroad.
Time Limits: The goods must be exported within three months of the sale. If the goods need processing before export, this period can be extended.
Customer's VAT Registration: If your customer is registered for VAT in their local country, you can zero-rate the sale, provided you keep records of the export goods leaving the UK within three months of the sale and obtain their local VAT number.
Distance Sales: If your customer is not registered for VAT, the transaction is classed as a 'distance sale', and you need to charge UK VAT.
Customs Declarations: You must complete customs declarations using the National Export System (NES) and the New Computerised Transit System (NCTS) for goods leaving the UK.
Special Circumstances: There are specific conditions for zero rating in certain circumstances, such as relief for marine fuel or exports by retailers.
Exporting Services
When exporting services from the UK to Europe, the VAT treatment depends on the type of service and the status of the customer (business or consumer).
Here are some key points:
Business to Business (B2B) Services: If you supply services to a business customer in the EU, the place of supply is where the customer is located. These services are outside the scope of UK VAT, meaning you do not charge UK VAT.
Business to Consumer (B2C) Services: If you supply services to a consumer in the EU, the place of supply rules vary depending on the type of service. For example, digital services are taxed where the consumer is located, and you may need to register for VAT in the consumer's country or use the Non-Union VAT MOSS scheme.
Use and Enjoyment Rules: Some services are subject to use and enjoyment rules, meaning they are taxed where they are effectively used and enjoyed. If these services are used and enjoyed outside the UK, they are outside the scope of UK VAT.
Tour Operators Margin Scheme (TOMS): For travel services, the margin on designated travel services which take place inside the EU will be zero-rated, in line with the current treatment of supplies that take place outside the EU.
Financial and Insurance Services: If you supply financial or insurance services to persons outside the UK, these services are outside the scope of UK VAT, and you may be entitled to recover VAT incurred on related expenses.
When to Register for VAT in the EU
As a UK business, you may need to register for VAT in the EU under certain circumstances:
Digital Services: If you sell digital services to EU customers, you may need to register for the Non-Union VAT OSS scheme. This scheme allows you to report and pay VAT on digital services supplied to EU consumers in one EU member state, rather than having to register in each country where you make sales.
The Non-Union VAT OSS scheme is designed for businesses that are not established in the EU but supply services to EU consumers. This scheme allows you to register for VAT in one EU member state and report and pay VAT for all your B2C (business-to-consumer) supplies of services across the EU through a single, quarterly VAT returnGoods Sales: If you sell goods to EU customers and the total value of these sales exceeds the distance selling threshold of £8,818, you must register for VAT in the countries where the goods are sent.
Automated Digital Services: If your customer is a business with a valid VAT number, apply 0% VAT and add a clause on your invoice stating, 'The purchase is liable to Intra-Community supply 0%, Reverse charge.' If the customer is a private individual or a business without a valid VAT number, charge VAT according to their location.
If you are selling goods or providing services that do not fall under the scope of the Non-Union VAT OSS scheme, you may still need to register for VAT in each EU country where you exceed the local VAT registration threshold.
This threshold varies by country, so it's important to check the specific requirements for each country where you make sales
If you have any questions or need further clarification, feel free to reach out!