"Can Someone Explain the UK VAT to Me?" Topic

I get it's a value added tax. But who gets charged for it?

HMRC explains it here
link

Ed,
We don't, most UK companies have a way of deducting it from international orders.

Nick

It is charged on most services or products and is paid by the purchaser … and collected on behalf of Her Majesty's Customs and Revenue.

I hope the following simple example will explain it.

Blogs Metal sells Big Minatures bars of lead. Blogs Metals charges Big Minatures the selling price of the lead PLUS VAT. Every four months Blogs Metals pays the VAT they have collected to HMRC.

Big Miniatures casts figures from the metal, and sells them to Ed Twohours. They charge Ed the selling price of the lead PLUS VAT.

Every four months Big Miniatures pays the VAT they have collected to HMRC … BUT they are allowed to deduct the VAT they paid to Blogs Metals from the VAT they have to pass on to HMRC.

I hope that this makes it a bit more understandable.

P.S. Companies that have a turnover under a certain limit do not have to charge VAT on whatever they sell but have to pay it on what they buy. Sorting out the VAT for the company I used to run for over ten years took me quite a bit of my admin time … and the government never paid me a penny for collecting tax on their behalf!

The regulations regarding the collection and payment of VAT on goods and services bought inside and outside the European Union would fill several pages.

Basically If I sell something outside the EU, I don't charge the customer for the VAT and this is allowed by HMRC. As countries within the EU have different rates of VAT, you pay the VAT rate charged in the country you have bought from and charge/collect the VAT that applies within your country.

I bet you are really glad that you asked this question!

Note – no value needs to be actually added, in order for VAT taxes in general, to be applied by the host countries.

My head hurts now.

Basically If I sell something outside the EU, I don't charge the customer for the VAT and this is allowed by HMRC.

Thought that was it. A friend of mine in the US did business with two companies in the UK (Magister Militum and Ral Partha Europe) both sent him prices without the VAT. First class operations.

The third UK company said "The listed prices are the listed prices". Rather classless but will go unnamed by me. So he decided not to order a couple of hundred bucks of their stuff.

Thanks for the info.

Ed, just think of it as a 20% sales tax.

Ed, some companies won't charge VAT as their turnover is too small, so in that case the list price is the list price, since there is no VAT to deduct. GZG is an example of this.

G.

G. Thanks for the info.

It is a way that a progressive government can get more money from the rich. The reason this is true is the rich have more money and therefore buy more goods, paying more tax. It is a national sales tax. In the US, taxes on retail sales go to the state government and sometimes local governments. What's the sales tax in New York City now? So when the administration implements a value-added like text, there'll be additional revenues generated to the federal government and it could be said that they did not raise taxes, which are considered generally to be income tax, on the money that you get. So with VAT In place, you pay tax on the money that you get, and you pay money on what you spend. so they get it coming and going.

Anyway, that's how it was explained to me if it were implemented in the US.

I'm looking at making a purchase from Hinchliffe in the UK. I live in the US. They list two prices; one with VAT and one without. Which price will I pay?

In the US you should not pay VAT.

If your trading turnover is small, less than £81,000.00 GBP per year currently, then you do not charge VAT on your goods, neither are you able to reclaim VAT on raw materials you buy.

Over that figure, you charge VAT (to all EU customers) but you get to reclaim the Vat you paid to your suppliers.

So if a company says to a US customer, no I can't reduce the price because of VAT it means one of two things, in most cases that they are below the VAT threshold, therefore to do so would be a price reduction to that customer of 20%. Or they are playing fast and loose and collecting VAT where they should not.

Now everybody likes a bargain, but if the 'classless' company in your example is under the VAT threshold, they have lost a sale simply because they abide by the rules.

So if your friend comes to order from them another time and they are no longer trading, remember that.

FreddBloggs makes a very good point. It may be that the unnamed company is below the VAT threshold.

Within the EU you are in breach of the regulations if you show that your prices include VAT and you are not VAT registered. This would mean that you are collecting VAT … and not paying it to the government.

In the UK a VAT registered company must show their VAT registration number on their invoice. It follows, therefore, that if there is no VAT number on the invoice, they cannot charge VAT.

Simple … It isn't!

"It is a way that a progressive government can get more money from the rich. "

No, actually like all production/sales tax it falls disproportionately on people with lower incomes as they spend a higher proportion of their income and save less.

The absolute amounts may be higher for the more wealthy, but the proportionate amount is less.

VAT is slightly unusual in that it is charged on the difference in value at each stage of production, which always struck me as un-necessarily complex.

To make things worse, different things are charged different rates – which means that there have been quite a few high-profile cases over the years when a /9usually food) manufacturer has tried to say 'my product isn't x therefore it shouldn't be taxed'. This means that there have been lots of paperwork generated re what things are.

Like the very expensive legal case to determine that a jaffa cake is indeed a chocolate covered cake (VAT free), and not a chocolate covered biscuit… (VATable).

VAT is slightly unusual in that it is charged on the difference in value at each stage of production, which always struck me as un-necessarily complex.

has it's pros and cons. The down side of a straight sales tax, rather than a VAT, is that it hands a big advantage to large companies. If sales taxes are charged on business-to-business sales, long supply chains get massively expensive, since tax is being charged at every level, so a firm that owns its whole supply chain can hugely undercut. If, on the other hand, it's only charged on retail sales, besides the obvious scope for lying about what sales are actually retail, it puts the whole burden of the system on the final seller, which distorts things rather badly. If it was 5 or maybe even 10 percent, a sales tax would be better, but at higher rates a VAT system does tend to work better, in spite of the complexity.

FreddBloggs wrote:

If your trading turnover is small, less than £81,000.00 GBP GBP per year currently, then you do not charge VAT on your goods, neither are you able to reclaim VAT on raw materials you buy.

Not necessarily. The VAT threshold is the annual turnover at which registration for VAT becomes compulsory. Companies may choose to register for VAT voluntarily below that threshold.

All the best,

John.

Just as an aside, Government Departments have to pay VAT when they buy from private companies and this just makes the VAT go around in a circle. E.g., the UK Ministry of Defence hires a private company to do repair and maintenance for its helicopters. The private company does the work and charges the MOD and adds on VAT. The MOD pays the bill, including the VAT. The private company pays the VAT to Revenue and Customs, who give it to the Treasury who use it, like all other taxes collected, to fund government expenditure – such as repair and maintenance of helicopters!

I think this has already been explained by others but, in the event further clarification is needed read on:

VAT is a tax on goods, like an American sales tax, with one very important difference, which has some important consequences for consumers.

The difference is that VAT is included in the price of the goods as listed and not added on at the time of sale. In practice this means if you walked into a store in the UK and an item is marked as £20.00 GBP, you as a consumer in the UK will be charged £20.00 GBP at the cash register (as an aside Europeans are terribly confused when they pick up an item marked $20 USD in a US store and are charged $21.40 USD at check out).

However, much as US sales taxes are usually not charged when the buyer is out of state and the item will be shipped, VAT is required for consumers who are buying from outside the EU. So if you, as an American in America purchase a £24.00 GBP item on a website and have it shipped to your US address you should be charged £20.00 GBP

Five other points are also important, but less so, for American consumers in understanding VAT.

First, smaller businesses are not required to charge VAT, hence it won't be deducted from the price at the time of purchase.

Second, some businesses refuse to deduct VAT from the price of goods because they find it too complex to do so. It is legal for them to charge a consumer the VAT even if the consumer is outside the EU. (I usually avoid doing business with such entities).

Third, some businesses do deduct VAT from the price of goods, but pocket the difference. I believe this is now illegal, but I doubt it is very practical to force sellers to comply with the law (I also avoid doing business with such vendors).

Fourth, often, given the shipping costs involved, VAT deductions mean the item effectively costs the original listed price once shipping is calculated. So a £48.00 GBP is £40.00 GBP to a US consumer without VAT, but shipping will cost £8.00 GBP so as a US consumer you pay about £48.00 GBP for the item, but get it delivered to your door.

Fifth, VAT is significant on most goods (20% in the UK) so the savings for the consumer is significant if it can be avoided. Each country in the EU sets and collects its own VAT and rates vary from country to country. So VAT in Germany is 19%, and 23% in Poland. Rates also vary based on the items purchased and can be as low as 0% (last I checked books in the UK are charged at 0%).

Some rather useless, but perhaps interesting information is that VAT is in theoretically a Value Added Tax. As originally conceived it was charged at different points in the production process as value was added to an item. So a Cornish tin mine that produced that sold £5.00 GBP of tin ore to a Yorkshire smelter would see the tax paid on the whole £5.00 GBP of tin ore. The smelter in turn would take the £5.00 GBP of tin ore into £15.00 GBP of tin and sell it to a Nottinghamshire miniature manufacturer. At the time of sale VAT would be charged on the added value, which in this case is £10.00 GBP Finally the manufacturer would take the £15.00 GBP of lead and and turn it into £50.00 GBP of figures. At the time of sale VAT would be charged on the £35.00 GBP added value. That, at least, is the theory.

My understanding is that this more true in theory than reality. As I understand it, in the UK it is paid only by the final consumer, so in reality using the above example if the figures are sold to a consumer for £60.00 GBP the reality is that the seller is receiving £50.00 GBP and Her Majesty's Revenue Service receives the other £10.00 GBP

VAT is also a very significant source of revenue for many countries in the EU. In France I believe it provides over 50% of the governments revenue. On the other hand in the UK VAT only provides about 15% of government revenue.

My explanation may be simpler. Government's need money, your money and will get it one way or another.

"Ed, some companies won't charge VAT as their turnover is too small, so in that case the list price is the list price, since there is no VAT to deduct. GZG is an example of this."

This has been an enlightening discussion, but I have to reply to this one because GZG DOES charge VAT. They used to just deduct the VAT percentage after you checked out but according to the web site they now have it set up so that prices shown are automatically adjusted depending on where you are ordering from. Jon does a pretty big business, apparently (and thankfully!).

Jerry

Nazrat

No, they don't. What actually happens is the shopping cart software they use automatically includes VAT even though the don'y charge it, so they change the prices in the shopping cart so that everybody pays the ex-vat price. If you look at the price in the description of the miniature, it will say something like £2.00 GBP. When you use the shopping cart it will show a figure price of £1.60 GBP plus a VAT charge of £0.04 GBP, for a total of £2.00 GBP. You aren't paying 40p in VAT, GZG just can't turn it off in the shopping cart software, so I'm lead to believe.

G.

You're getting things mixed up there Goober – GZG are most definitely VAT-registered, and do indeed deduct VAT on non-EU sales.

NOTES while we get the new store version up and running:

At present, all prices on the store are displayed INCLUSIVE OF VAT – we don't currently have the option to display the ex-VAT prices for non-EU customers, though we hope this will return as soon as we can sort it out; in the meantime, all non-EU customers please rest assured that the VAT will be deducted for you at the checkout stage, and the ex-VAT subtotal will be displayed at that point on all orders.

If you are vat registered then most shopping carts these days have an automated system (if you use it) which only shows prices with VAT if your shipping address is within the UK.

We are not registered, so our £5.00 GBP are £5.00 GBP, not £5.00 GBP plus 20%.

Now everybody likes a bargain, but if the 'classless' company in your example is under the VAT threshold, they have lost a sale simply because they abide by the rules.

No, they lost the sale because they were asked a specific question and gave a bad answer. Everyone pays the listed price regardless of where they live.

No direct answer to the question.

Thanks for the info everyone.

VAT is always paid by the final consumer, except in foreign sales. For example, when I buy Hasbro action figures from EEdistribution (a wholesale dealer in California) I don't pay California taxes, but when I received the goods, Spanish customs charge me the corresponding VAT. Theoretically, as a business, I am not paying the VAT, but making an advance payment in behalf of my customers. Then, after calculating my costs price -VAT excluded-, expenses and intended profit I reach a final selling price, to which I will add the VAT. Every time a customer buys an item, I will be collecting that VAT in behalf of Spanish revenues agency. As I have paid up front a part of it, when I will make my VAT declaration I will discount from the total amount charged to my customers the amount I have paid up front. Therefore, as far as VAT goes I am acting like an unpaid tax collector for the revenues office.

However, if I ship a good outside Spain, I must not charge the VAT, as it is considered a national tax. Actually, when I, as a business, buy in a British or German distributor, I don't pay VAT up front.

Bottom line is that the revenues agency will receive the amount resulting of adding the VAT tax (21% in the case of Spain) to the final selling price (VAT paid minus VAT advanced). Thus, for each 10 euros I charge a customer in Spain, the revenues office will receive 2.1 euros, I will 7.9 euros, from which I will deduct my costs and operation expenses. The rest will be my benefit before taxes.

I've always been curious as to why, when ordering from the USA, I have to pay the list price for figures there, which presumably includes the local sales tax? Then pay VAT (for over £15.00 GBP worth of figures) when it comes into the UK.
Is this because US companies list all prices without sales Tax or have I been charged Tax by the company when I shouldn't have been?

Optional Field wrote:

"Second, some businesses refuse to deduct VAT from the price of goods because they find it too complex to do so. It is legal for them to charge a consumer the VAT even if the consumer is outside the EU. (I usually avoid doing business with such entities)."

Not quite right. It is illegal to charge VAT to a customer outside of the EU, it does not necessarily mean that you make a deduction to the price point (but no VAT was levied on that sale, and will be recorded as such on the VAT return).

Sorry Ed, I still don't follow. They were asked the price and replied it is the same price for everyone, without knowing the exact question as asked, nor the precise reply, that may be a perfectly correct and valid answer.

As an aside, if you publish paper books only (not ebooks or books with VATable add-ins etc) every quarter the VAT man sends you a cheque (providing you are registered).

Question of tone I guess – if their actual word-for-word reply was: "Everyone pays the listed price regardless of where they live"… then frankly they need to think about how they respond to questions, as it's rather abrupt and doesn't actually answer the specific question of whether VAT is being charged.

If they'd just said "we're not VAT-registered so there's no tax to deduct, and the overseas price is therefore the same" all would be well. The fact that they didn't suggests either (a) they need to brush up on their communication, or (b) they are VAT-registered, don't deduct, and therefore don't want to answer any VAT questions….

Drumcharry –

US companies typically post prices without any tax included. This holds true for internet sales (which mostly don't have tax applied at all(unless in the same state)) and for store sales which do have tax applied at the register.

So a $1 USD item on the internet will be $1 USD but a $1 USD item in a store will end up being something like $1.06 USD depending upon the sales tax rate.

There are exceptions to this such as gasoline sales where the taxes are included in the advertised price, obviously not applicable to internet sales.

Hi Fredd,
Here's the exact question and answer. Guess I could have been clearer :)

"How do you charge for VAT? I am asking as I live in the US."

Everyone pays the listed price regardless of where they live.

It is illegal to charge VAT to a customer outside of the EU.

In order to not charge VAT to a non-EU customer a VAT-registered UK business, for example, must be able to prove the items have been exported, otherwise it must charge VAT at the UK rate. Some companies do not want the bother of trying to prove an item has been exported, which at the least involves obtaining a certificate of posting. They can therefore allow for VAT in the price to a non-EU customer.

From the HMRC website:

"3.3 Conditions for zero-rating direct exports

"A supply of goods sent to a destination outside the EC is liable to the zero rate as a direct export where you:

"make sure that the goods are exported from the EC within the specified time limits (see paragraph 3.5)

"obtain official or commercial evidence of export as appropriate (see paragraphs 6.2 and 6.3) within the specified time limits

"keep supplementary evidence of the export transaction (see paragraph 6.4), and comply with the law and the conditions of this notice."

And

"3.7 What if I can't meet all the conditions?

"If you do not meet all the above conditions the supply cannot be zero-rated as an export and you must account for VAT at the appropriate UK rate (see paragraph 11.2).

"It is therefore essential that you establish at the time of sale what type of export documentation will be sent to you to support the zero-rating of your supply."

And

"6.8 What happens if I do not hold the correct export evidence?

"If you do not hold the correct export evidence, within the appropriate time limits, then the goods supplied become subject to VAT at the appropriate UK rate. See paragraph 11.2 for details of procedures to follow in these circumstances."

It is no surprise that VAT is confusing to anyone who doesn't have to deal with it in day to day life. :-)

Hi Ed

Quick question have you been back to the web site of the company that quite kindly remains unnamed by yourself and looked to see if it is VAT registered. Their VAT registration number should be displayed and most likely on the home page this of coarse does not excuse poor communication or rudeness. In my experience most UK companies in this small community are not VAT registered due to the exemption allowed to small companies with turnover below £81,000.00 GBP per annum. I have traveled the USA extensively and it was quite a surprise at first to find tax added to the list price of items in stores once you get to the checkout we are not used to this and it is a common source of concern to some when in the USA, for me i don't mind i quite like to know where my taxes are going and think that we should all have to do a tax return in the UK, PAYE is a most sinister method of taking tax. Anyway the easiest way to deal with this for US consumers is to just look for a VAT number if there is no number then the company falls below the threshold and is not charging VAT so can't deduct it. I say this because like most bureaucracy involving TAX they are all over the small guys and there really is very little chance that the company should be VAT registered and is not.

Perhaps you can tell us if there is a VAT number on the site at least.
Sparki

Hi Sparki,
Thanks for the info. I couldn't find one BTW but it may not have to be listed.
Ed

Hi Ed

They are most likely not registered then as it is a criminal offence to be registered and not display your VAT registration number. Still rude to answer in that manner though. A lot of small businesses in the UK tend to have a hang up about it as well as it sort of indicates they are small they worry that this will affect sales, been in that position years ago. Got to go getting hungry best Stake and Boston potatoes Cheyenne Wyoming wish i was there ha ha

Sparki

Three words

"Pay da man"

Thanks for the info Leidang…at least I know I haven't been paying too much :D

They are most likely not registered then as it is a criminal offence to be registered and not display your VAT registration number.

It's required on invoices. Its not compulsory on the website.

I think it is actually Geoff.

Companies act 2006.

Hi Angel

Me too but then as before i always stand ready to be corrected.