VAT on Overseas Services to UK Customer

If you’re a business supplying services from outside the UK to customers within the UK, navigating the VAT rules can feel like decoding a secret language. But don’t worry, understanding how VAT works in these cross-border transactions is absolutely doable — and very important to keep your business compliant and efficient. So, let’s take a walk through the essentials of VAT on overseas services to UK customers, in a way that’s straightforward and practical.

What is VAT on Overseas Services?

VAT, or Value-Added Tax, is a consumption tax that is applied to most goods and services in the UK. The standard rate of VAT for most services, such as professional and digital services, is 20%. It is useful to understand how VAT on overseas services operates when services are exported since the UK VAT regime has been altered post-Brexit.

For overseas services to UK customers, whether VAT can be charged or not will be determined by whether you’re selling to a business consumer or an individual consumer, and the nature of the service you’re supplying. It’s worth getting this right to avoid charging VAT unnecessarily, or not charging VAT when you should be and accounting for it.

Who Are You Selling To? Business Customers or Consumers

The VAT rules differ enormously depending on whom the customer is:

Business Customers (B2B): If a foreign supplier provides services to a UK VAT-registered business, UK VAT ought not to typically be charged on the bill. Rather, the UK business will need to account for the VAT by way of the reverse charge.
Individual Consumers (B2C): If the customer is a UK private consumer who is not registered for VAT, the overseas supplier generally has to charge UK VAT on their services. This is generally the case for digital services, like streaming services, software downloads, or online tuition.

It’s a way that allows VAT to be paid where it is actually consumed, and that is a fundamental rule for VAT systems across the world.

The Reverse Charge: What Is It and How Does It Work?

Reverse charge is one of the key principles of UK VAT on cross-border services. It is the reporting of the VAT by the customer rather than the supplier when the service is supplied from outside the country and the customer is a UK VAT-registered one.

That’s the reason why there is such a system: if all overseas suppliers had to register for VAT in the UK and charge VAT on all UK customers, it would be a huge administrative burden. So, instead, the UK business customer self-assesses the VAT. They recover the VAT as input VAT (as if they themselves sold the service) and simultaneously offset it as output VAT, if they are entitled to recover VAT, in which case the net VAT charge would be nil in most cases.

For example, if you are a UK marketing firm purchasing consultancy from overseas, you would account for the reverse charge on your VAT return rather than paying the VAT upfront to the supplier.

When is VAT on Overseas Services Directly Charged by Foreign Suppliers?

While reverse charge covers the majority of cross-border B2B services, there are a few occasions when an overseas supplier will be required to charge UK VAT directly:

When supply is made to a UK consumer, the overseas supplier is typically required to register for UK VAT and charge VAT on invoices to consumers at 20%.
Supplying some digital services to customers in the UK needs to be VAT-registered from the very first sale without any registration ceiling. These include services delivered electronically such as apps, software downloads, streaming, and learning materials online.
Online channels facilitating sales of digital services can also be held liable for VAT collection.

Therefore, as an overseas digital service provider selling to UK consumers, you must register for UK VAT and report VAT even if you sell one item in the UK.

Understanding the Place of Supply Rules

You must understand where your service is being “supplied” or “consumed” to supply VAT and to report it. The UK has a ‘place of supply’ system to decide whose VAT rules to use.

For B2B services, supply location is usually where the business customer resides. So, if you are a UK non-supplier selling to a UK business, supply location is considered to be in the UK, which necessitates reverse charge VAT liabilities.

For B2C, the supply location is typically where the supplier is located (hence UK VAT relevant if supplier is in the UK), although there are major exceptions, especially for digital services where the supply location is where the customer is located.

The regulations make you capable of ascertaining thoughtfully your customer’s status and location so that you may charge VAT.

What Types of Overseas Services Do You Normally Charge VAT On?

Almost all the services UK businesses purchase from overseas suppliers are liable to the reverse charge VAT process if there are no exceptions. These services might include consultancy, advertising, telecommunications, hiring goods, research, education, rights or licences, and so on.

There are exceptions, however, for example, land-related services or certain financial services which qualify for different treatments of VAT.

Practical Steps for Offshore Suppliers and UK Customers

For overseas suppliers delivering the UK customer, here are some guidelines for hands-on action:

When exporting to UK companies, secure and verify the UK customer’s VAT registration number carefully. This facilitates the VAT-free sale under reverse charge conditions.
Clearly indicate on the invoice where VAT is exempt from being charged under reverse charge, indicating the relevant VAT legislation.
If selling to UK customers, you should be registered for VAT in the UK and charge VAT appropriately from your initial sale.
Acknowledge that the VAT compliance cost can switch depending on customer type and service offered.

For UK business customers supplied with services, take note you may need to account for and recover VAT under the reverse charge on your VAT return. Keep proper records of overseas invoices and VAT treatment since HMRC will require proof of compliance.

Misconceptions of VAT on Overseas Services

You wonder how foreign suppliers can’t just cheat the VAT by claiming the service is “outside the UK”. It isn’t quite that simple. HMRC demands correct VAT treatment on the basis of place of supply and customer status backed up by evidence like VAT numbers and location proof.

Another common mistake is the misinterpretation of digital services. Since Brexit, the UK does not follow the EU One Stop Shop (OSS) for digital services anymore. This means digital providers have to handle UK VAT obligations separately, typically requiring new registrations and accurate VAT reporting.

Stay Updated and Get Professional Advice

VAT on overseas services to UK consumers can be complicated and are subject to fluctuation. As an example, some recent changes imposed greater constraints on online marketplaces and VAT responsibility on overseas vendors of goods or services.

If you want to be on the right side of the law and optimize your VAT status, it is always wise to seek advice from a VAT specialist or accountant familiar with international VAT.