Are you going global? Make sure to know before you go by learning the laws and regulations of your destination country. To help you get started, here’s some advice on the differences between tax and VAT laws for US companies looking to expand into the UK.
1) When do you need to think about VAT?
When you do business in the UK and Europe, VAT becomes a consideration. Approximately 150 countries have a VAT system, also known as GST (goods and services tax), business tax, etc. Applying a VAT or GST type of tax has been gaining favour over traditional sales taxes throughout the world because VAT avoids the cascade effect of sales tax, by taxing only the value added at each stage of production.
2) How does VAT work?
The seller charges VAT to the buyer, and the seller pays the VAT back to the government. But if the purchaser isn’t an end-user – and the goods and services it buys are actually business costs – the business can deduct any VAT it has incurred on this purchase against the tax it is required to pay the government on its sales. That way the government only receives tax on the gross margin of each transaction by each participant in the supply chain.
3) What are the differences between VAT and sales tax?
VAT (Value-added tax), in theory, is very much like sales tax in that it should be paid by the final consumer on goods and services bought within the relevant country. But, the difference is that VAT is applicable throughout the entire supply chain – not just at the end. Because VAT is paid at every stage of the supply chain, businesses can recover the VAT that they are charged on the costs for their business. Of course your business wants to get the maximum amount of credit that’s available, based on government rules. However, this brings a load of admin and complication into the mix.
4) So what does this mean for you as a business?
Two important things apply here: make sure you charge the right amount of tax on your sales for each country, but equally make sure you get the full credit you’re entitled to on your business expenses and ensure you’re only paying what you’re supposed to pay.
5) Where do employee expenses come into the mix?
People often forget about employee expenses. When you’re travelling (or setting up, or expanding your business into other countries) outside of the USA you will be paying VAT on a lot of your purchases, including business travel and expenses. In most cases, this can be recovered from the UK government. Reclaiming VAT doesn’t have to be complicated, but you do need to comply with the rules.
6) How can you get help?
To avoid any confusion, talk to an expert. Concur has a guaranteed VAT compliance service in the UK, but also manages VAT rates and recovery rules on your behalf as part of the solution. It also has an audit service, to check that the relevant documentation is obtained, and enable you to recover the maximum amount of VAT. Concur also has partnerships with international VAT recovery firms that can assist you in recovering VAT on your international travel and expenses.
7) What should you do now?
To find out more about getting more VAT back read these blog posts: