The crossovers in language, culture, music, art, and sports, combined with the purchasing power of a 68-million-strong nation, make the UK a key market for US companies looking to expand.

In fact, the UK imports around £57 billion of services and £58 billion of goods from the US each year.

While the long-term relationship between the two countries allows trade to flow, selling in the UK means US businesses may become liable to UK tax law. In particular, Value Added Tax (VAT).

It’s our version of a sales tax, although it works slightly differently than in the US where it only applies to retail sales. This can confuse companies, and getting it wrong carries the risk of a fine or penalty from HMRC.

So, to simplify VAT for US companies, we’ve answered all of the most common questions that our advisers receive each year from overseas clients.

What is VAT?

VAT is a tax charged on the sale of most goods and services in the UK. Here’s how it works:

1. When a business sells something in the UK (products, services, digital downloads, etc), they typically add VAT to the price. The standard rate right now is 20%.
2. VAT isn’t meant to hit businesses themselves. It’s a tax on the consumer at the end of the chain. VAT-registered businesses can reclaim any VAT they’ve paid on their own business purchases.
3. Your business acts like a VAT collector. It charges VAT to customers, subtracts the VAT you’ve already paid on your business expenses, and then hands over the difference to HMRC throughout a quarterly VAT return.

Does UK VAT apply to US companies?

Yes, generally, VAT applies to any company selling goods or services in the UK – regardless of whether they’re based in the US or elsewhere.

What are the VAT rates?

This is where things start getting more complicated. There are different rates of VAT in the UK depending on the type of goods or services provided, so US companies should carefully check what rate applies to their business (use this guidance from HMRC).

The rates are:

• Standard Rate (20%): Applies to most goods and services.
• Reduced Rate (5%): Applies to some goods and services.
• Zero Rate (0%): Applies to a specific set of zero-rated goods and services.
• VAT Exempt: Goods and services which are fully exempt from VAT.

If you’re wondering how zero-rated (0%) and VAT-exempt differ: Zero-rated goods still count as taxable sales, meaning you can reclaim any VAT you paid when buying materials or supplies for those goods.

On the other hand, you don’t charge VAT to customers for VAT-exempt services, like insurance, healthcare, or education, but you can’t reclaim it on related expenses either.

Do US companies need to register for VAT?

Yes, a US-based company selling goods or services to the UK will need to register for VAT, which takes around four to five weeks, unless:

• You only provide zero-rated or VAT-exempt goods and services.
• You only sell to non-business customers through an online marketplace.
• You only sell to VAT-registered businesses in Great Britain (England, Scotland and Wales) that use the reverse charge procedure to account for VAT.

It’s better to be safe than sorry though. So if you’re based in the US and think your business might not need to register, nor charge, VAT, then we highly recommend speaking to one of our team to confirm. There is no threshold so, unless the above exceptions apply to your company, you will be required to register for VAT when you make any sale in the UK, regardless of value.

Do we need separate VAT registrations for the UK and the EU after Brexit?

Following Brexit, the UK and EU are now separate jurisdictions for VAT, so you will need separate registrations if your goods and services qualify for VAT in both.

You’ll almost certainly have to register for UK VAT unless you meet one of the few exemptions (see the question above), but you should also check the EU VAT laws.

Do US companies need to file VAT returns?

Yes, US companies must prepare and file VAT returns if they are charging and collecting VAT on sales in the UK. Fortunately, it’s quite easy to do – you will be automatically signed up to Making Tax Digital (MTD) for VAT unless exempt.

As part of the MTD requirements, you will keep digital accounting records using compatible software, which have the ability to prepare, calculate and directly submit returns to HMRC.

Do US companies selling goods directly to UK consumers charge VAT?

If the sale value is under £135, then you (the seller) charge the appropriate VAT rate at the point of sale once you are VAT registered.

If the consignment value is over £135, then duty may also be due. You (the seller) can declare the VAT on your UK VAT return and reclaim any import VAT (or use postponed VAT accounting to just report it and reclaim later through the VAT return), or the consumer can pay it at the point of import by you sending the goods DDP – although keep in mind this creates more work and expense for your customers.

Do US companies selling goods through online marketplaces charge VAT?

Marketplaces make VAT simpler, but they don’t remove the requirement for you to register entirely, especially if your products physically touch UK soil.

If you’re a US-based business selling goods via an online marketplace in the UK, then it’s usually the marketplace who handles charging and paying UK VAT directly to HMRC as long as the goods are valued below £135.

One exception is where the customer is a VAT-registered business in the UK and has provided their VAT number. In this case, the customer accounts for VAT using the reverse charge mechanism.

However, your business will still need to register for VAT if:

• You’re storing goods in the UK (like using a fulfilment warehouse).
• You’re importing goods into the UK yourself before listing on the marketplace.

Do US companies selling digital services to the UK charge VAT?

For services, VAT usually depends on where the customer is based and what type of customer they are. In short:

• UK-based business? Usually, no VAT, but the reverse charge applies.
• UK-based individual? VAT is required from the outset.

Okay, so what does this mean?

If you’re supplying services (say, consulting or software development) to a VAT-registered business customer in the UK, you don’t usually charge VAT. Instead, your UK customer applies the ‘reverse charge mechanism’, meaning they account for the VAT on their own VAT returns.

For example, you’re a US-based marketing agency providing services to UK businesses. You can invoice your clients without VAT and, instead, state that ‘Reverse charge applies’. It’s then down to the client to account for VAT correctly.

On the other hand, selling digital services (like eBooks, online courses, streaming, or subscriptions) directly to UK consumers means you must register and charge UK VAT from your very first sale. There’s no minimum threshold here, unfortunately.

So, say you’re a US-based online training company selling courses to individuals in London. From day one, you’d register for UK VAT and charge the full 20% VAT on each sale.

Finally, do we need to appoint a VAT representative in the UK?

You may have heard of US businesses appointing UK-based tax representatives.

This isn’t a requirement – you can manage everything in-house if you wish. There are some extreme cases where HMRC will ask you to appoint a VAT representative, for example, if you’ve had compliance issues in the past, but this is rare.

So, the question is not, ‘Do we need to appoint a VAT representative?’, but rather, ‘Should we appoint a VAT representative?’.

Many US businesses will choose an accountant in the UK to handle their VAT account, simplify compliance and reduce hassle. It’s not mandatory, but it can be a smart choice for peace of mind.

If your business would benefit from the extra support of our VAT specialists, then please fill out a contact form or call our team on +44 020 7299 1400 – we’re available any time between 8am-6pm (GMT/BST), which is 3am-1pm (EST) or 12am-10am (PST).