It’s another “write an answer to a question we get asked a LOT” blog post. This post includes a lot of what NOT to do, covering some of the most common mistakes people make.
It’s becoming increasingly common for even micro UK businesses to have clients outside the UK. For the purposes of this post I’ll be talking about sales of:
– services rather than physical products,
– NOT “digital services” for the purposes of VAT MOSS (ie bespoke work you’re doing, rather than selling a “make once sell many” eBook/app/similar),
– sales that are B2B rather than B2C (ie you’re selling to an overseas established business, rather than an end consumer),
– from a UK supplier to an international customer.
The key thing that can get complicated is where is the place of supply deemed to be, and the above are key in making that decision. Where all the above apply, the place of supply is deemed to be where the customer is based (hence not in the UK), so no UK VAT should be charged.
Very brief outside scope vs exempt/zero rated
It’s also important that these sales are outside the scope of UK VAT, rather than being a sale that’s zero rated or exempt from UK VAT. If you think this sounds pedantic, it certainly isn’t if you’re on the flat rate scheme, as your FRS % isn’t chargeable on outside the scope sales, but is chargeable on zero rated/exempt sales (despite no VAT being charged).
How to deal with this correctly on FreeAgent
The key section is “Contacts“. I appreciate some of you only use this for client name for your own internal purposes and nothing more, but this is one situation where completing at least a little more information is compulsory.
Key things are:
1) Ensure you change the country drop down from its default United Kingdom to the appropriate country. This is NOT just for show.
2) Check the setting slightly further down. This will default to what’s normally the correct setting, but where you’re selling services internationally, B2B, you want it to show “Charge VAT – Only if contact is also based in the United Kingdom VAT area“.
With those settings as above, when you then go on to raise a sales invoice to that client from the “Work” –> “Invoicing” section of FreeAgent, it should correctly be treated as outside the scope of VAT.
This means not only will you not charge VAT to your client, but the sale won’t appear at all on your (UK) VAT return.
Extra possible quirks
A few extra things to consider:
- EC sales lists – no additional tax is at stake, but where you sell services to EC countries, you’ll likely need to start submitting EC sales lists. These are relatively straight forward and can be submitted online, they’re basically just a summary of your European customers, their country, their local VAT number, and total value of your sales to them.
- B2C sales – if your client is an end consumer, but you’re still selling a bespoke service internationally, then you should change the “Charge VAT” setting to “Always”. Reason being for B2C sales typically the place of supply is deemed to be where the supplier is based (rather than customer), hence sales are deemed to happen in the UK.
- Sales of “digital services” – the B2C sales rule above was to some extent abused by the likes of Amazon who were able to set up shop in low VAT countries like Luxembourg, so if a UK consumer wanted to buy an ebook, they’d pay 15% VAT to Amazon, or 20% VAT to a UK supplier, hence giving Amazon an unfair advantage as taxes made their prices lower than local competition. Therefore new rules were introduced from 1 Jan 2015 called VAT MOSS (or VAT Mini One Stop Shop). These meant where you’re selling “digital services” (this would be most things where you create it once then can re-sell an identical item lots of times, eg ebooks, apps, music/video etc) to an EU consumer, you need to charge VAT based on where your customer is. This is a bit of an admin nightmare for micro businesses, as you need your online shop to be set up to gather various bits of information from your client and charge their local VAT rate accordingly…then send this info on once a quarter, together with payment of international VAT. This is a complex area so no great detail gone into here.
- Sales of physical products – this very rarely applies to our typical client base, so again I won’t go into details here.