UK: VAT Compliance for Foreign Taxable Persons

The United Kingdom (UK) is one of the most digitized retail markets in the world, with more than 80% of the population buying goods and services online. By 2027, nearly 90% of the UK population will engage in online shopping, generating around GBP 150 billion in revenue for online sellers and digital platforms.

Therefore, it is unsurprising that the UK market is highly competitive and that more and more foreign online and e-commerce businesses are looking for opportunities to enter it. Foreign taxable persons, such as digital providers and e-commerce vendors, must be aware of the UK VAT rules and regulations to do so.

This article explains what business activities are taxable, the VAT registration process, how often VAT returns are submitted, and the penalties for non-compliance under the UK VAT Act.

Taxable Activities in the UK

The UK VAT Act defines a taxable activity as any supply of goods and services made in the UK by taxable persons, such as registered businesses or individuals, as part of their business activities. This includes the supply of goods and provision of services, such as radio and television broadcasting, telecommunications, and electronically supplied services (ESS).

Similarly to the EU, the UK defines ESS, or e-services, as services supplied automatically through the Internet or similar network, with no or limited human interactions. 

Additional valuable information for foreign taxable persons is that the standard VAT rate of 20% applies to most supplies of goods and services.

UK VAT Registration Requirements

Foreign taxable persons engaged in taxable activities in the UK or planning to make taxable supplies must register within 30 days of making the supply or when there is a reasonable expectation that such supplies will be made. Therefore, there is no registration threshold for foreign digital providers and e-commerce vendors making taxable supplies to customers located in the UK. 

The UK VAT registration process is completed through the online registration service on the HMRC website. Different documents must be submitted depending on the form of business, that is, whether the foreign taxable person is a legal entity or an individual. Once the registration process is completed, non-UK taxable persons will receive a 9-digit VAT registration number that must be included on any further invoice.

However, if all supplies made by foreign taxable persons are zero-rated, they are not obligated to register for VAT and can apply for exemption from registration.

Tax Representative

Non-UK taxable digital providers and e-commerce vendors do not have to appoint a tax representative to complete the VAT registration process. However, these taxable persons can appoint a tax agent, who can be either an accountant, tax adviser or, in some cases, even a friend or member of the family. If appointed, the agent submits VAT returns and handles VAT-related matters with HMRC.

UK VAT Returns

VAT returns in the UK are submitted quarterly through an online HMRC platform called Making Tax Digital. They are submitted within a specific deadline set for one calendar month and seven days after the end of the reporting period. VAT-registered businesses must submit a VAT return even if there were no VAT transactions in the reporting period.

Penalties for Failure to File Tax Return

Taxable persons who fail to submit VAT returns on time usually first receive a notice from HMRC concerning due VAT. In addition to being obliged to pay owing VAT, digital providers, and e-commerce vendors may also face additional penalties and interests for late submission of VAT returns.

There are two different methods of calculator penalties, depending on when the obligation to calculate VAT started, where the determining date is January 1, 2023. 

For businesses registered for VAT before January 1, 2023, that fail to file a VAT return on time, interest on the due VAT is calculated based on the turnover and number of offenses made in 12 months. Interest rates are calculated depending on whether the turnover is above or below GBP 150,000. 

Taxable persons who started accounting VAT on January 1, 2023, and after receive penalty points for each late return. Once the penalty point threshold is exceeded, they receive a penalty of GBP 200 for each late submission. 

Practical Implications for Foreign Taxable Persons

Non-UK digital providers and e-commerce vendors must consider several factors to comply with UK VAT rules.

The first step is to determine the palace of supply or the customers' location. This is done by applying the so-called place of supply presumptions. Presumptions refer to supplies of digital services made through a wi-fi hotspot or an Internet café, a consumer’s home telephone line in the UK, or a mobile phone that uses the UK SIM card country code.

Suppose non-UK digital providers or e-commerce vendors are unaware of the place of supply presumptions. In that case, the place of supply is determined based on the customer's IP address, billing address, bank details, and similar information. If any of these are related to the UK, the UK is the place of supply.

The next step is determining whether they make taxable supplies, such as ESS or sales of goods. 

The final step is determining who the customer is. If a customer is another legal entity, this falls under the scope of a B2B transaction, and usually, the customer is responsible for VAT. However, if the customer is an individual, in B2C transactions, the VAT must be charged at the point of sale and calculated at the rate applicable in the UK for such supply.

Supply of Low-Valued Goods Through Online Marketplace

Suppose a consignment of goods valued below GBP 135 is sold to a UK customer through an online marketplace, such as a website or mobile app. In that case, UK VAT must be charged at the point of sale, and the online marketplace is liable for the collection and remittance of the VAT.

An online marketplace is also liable for VAT if the goods sold by non-UK taxable persons through the marketplace are located in the UK at the moment of sale.

However, if the buyer is another business in the UK, a B2B transaction, then the online marketplace does not need to charge and collect VAT, and the buyer is liable for any VAT due.

The usual VAT and customs rules apply for goods consignments exceeding the GBP 135 threshold.

Supply of E-services Through Online Marketplace

When supplying e-services through a digital platform or marketplace, taxable persons must determine whether they are making a supply to the final consumer or the platform operator. 

If the platform operator indicates that taxable persons are online sellers, but the operator is the one that defines the terms and conditions, handles and authorizes payments, and delivers or downloads digital products and services, the platform operator is liable for VAT.

Conclusion

Foreign taxable persons have much to consider when determining their VAT obligations under the UK legislation. The additional challenge may be that HMRC, a governing body, often changes rules and regulations by updating guidelines or considering the ruling of the competent courts in cases relating to VAT matters.

All non-UK businesses that want to sell goods or services to UK customers should invest resources to understand the UK VAT landscape and avoid potential issues, penalties, and fines.