Around 50% of businesses do not recover VAT incurred overseas and there is an estimated $5 billion not reclaimed each year.
Tag Archives: international
VAT: New, important HMRC guidance for zero-rating exports
HMRC has updated its Notice 703 which explains the conditions for VAT zero-rating exports of goods. It is crucial for a business to have the correct documentation to evidence goods physically moving out of the UK.
Information on official evidence has been updated in paragraphs 6.2, 7.1 and 7.2 as follows:
- Para 6.2 Official evidence
Official evidence is an export declaration for the goods submitted to the Customs Declaration Service which has generated a departure confirmation. You will need the Movement Reference Number (MRN) or Declaration Unique Consignment Reference (DUCR) of the declaration.
- Para 7.1 Air and sea freight
- If you are using commercial transport documents as proof of export for goods exported outside the UK or EU by:
- air — you must obtain and retain an authenticated basic master airway bill or house air waybill endorsed with the flight prefix and number, and the date and place of departure
- sea — you must keep one of the copies of the bill of lading or sea waybill along with a note of the export declaration Movement Reference Number (MRN) or Declaration Unique Consignment Reference (DUCR) or, where a shipping company does not issue these, a certificate of shipment (certifying actual shipment) along with a note of the export MRN or DUCR, given by a responsible official of that company.
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7.2 Road freight
The international consignment note provides evidence of the identity of the contracting parties when goods are transferred by road. It is in 3 parts and is completed and signed by the sender of the goods, the carrier and the person receiving the goods. If the international consignment note is used as part of the evidence, it is important that the information is complete and all the details legible. Where the overseas customer arranges for the goods to be collected ex-works the international consignment note alone is not conclusive evidence that the goods in question have left the UK. Read paragraph 6.6 for additional evidence required when making an indirect export.
Where goods leave through a port using the Goods Vehicle Movement Service, you should retain the Goods Movement Reference of the vehicle for that journey.
Failure to produce the appropriate and accurate evidence will result in output tax being due on the relevant goods.
EU – Elimination of the threshold-based customs duty relief
The EU will abolish the rule that Customs Duty does not apply to low value goods (less than €150) entering the EU
It will impose a fixed Customs Duty of €3 from 1 July 2026, until completion of the EU data hub which is expected to be on 1 July 2028.
When operational, the data hub will enable Customs Duty to apply to all imported goods, regardless of value, on an ad valorem basis.
Updated Guidance on Zero-Rated VAT for UK Exported Goods and Customs Processes
HMRC has updated its guidance on applying zero-rated VAT to goods exported from the UK – VAT Notice 703.
The amendments reflect the latest legal requirements (the latest force of law) and customs processes as of 13 February 2026 and removes outdated customs terminology and guidance.
Summary
Goods exported from the UK can be zero‑rated provided they physically leave the UK and all HMRC conditions are met. Notice 703 sets out who can apply zero‑rating and the legal basis under the VAT Act 1994.
Conditions & time limits: Exporters must ensure goods are exported within specified time limits (generally within three months, but longer in some cases) and meet detailed conditions depending on whether the export is direct, indirect, or in special scenarios (eg; retailers, ships, aircraft).
Evidence & record‑keeping: Zero‑rating is only valid if acceptable proof of export is obtained and retained (such as customs declarations and commercial transport documents), with clear rules on records, customs systems, and compliance checks.
In order to zero-rate a supply, it is vitally important that exporters obtain the correct evidence that goods have physically left the UK and that all descriptions of the goods are accurate and satisfy HMRC requirements. There has been a significant amount of case law on export documentation (an example here) which illustrates that this is often an area of dispute.
Excise Duty: Your Christmas drink of choice, or perhaps not
A curious matter and one which brings into focus the drinking habits of people across the EU. Now, as those who know me will be aware, I am not adverse to a good single malt, nor a decent claret, but I do wonder sometimes where people draw the line.
Background
It transpires that in Lithuania people who choose not to drink, or cannot afford, even the cheapest alcoholic items have turned to drinking perfume and mouthwash which contain isopropyl alcohol. This has a similar effect on the human body to what most people would regard as being from more usual beer, wine or spirits etc. Sounds delicious eh?
Issue
The issue was whether these products where subject to Excise Duty, or, as the appellant contended, they were duty free as cosmetic products.
Decision
The AG found that isopropyl alcohol is almost unpalatable to most people. The fact that Bene Factum held out, advertised and marketed to people to drink the products did not affect the fact that the main purpose of the goods was for their use as cosmetics and mouthwash. What must be considered is Excise Duty depends on an objective classification to determine whether it is intended for human consumption. This classification is not affected by the fact that Bene Factum actively encouraged people to drink these products rather than use them for cosmetic purposes.
Consequently, the goods where not subject to Excise Duty. Good news for Lithuanian alcohol connoisseurs! It remains to see if the court follows this opinion, in most cases they do, but one never knows.
Commentary
If there is anybody out there who is getting ready for their Christmas party, looks at some cosmetic products and considers taking a swig, I make the following comments:
- Probably best to stick supermarket own brand booze if money is an issue
- I expect that these things taste absolutely terrible (although I have not sampled them)
- I tend to stick to things that are to be applied externally doing just that with them without ingestion
- If you can’t decide whether to gargle with something or drink it, I counsel spitting it out
- If these goods come to the UK, at least they will be even cheaper being duty free. I am not sure that is a good thing.
VAT Grouping: Protection of the Revenue
HMRC has updated VAT Notice 700/2 – Group and divisional registration.
The salient amendments are to the references to ‘protection of the revenue’ and ‘Revenue loss’.
VAT grouping is a facilitation measure by which two or more entities can be treated as a single taxable person (a single VAT registration) for VAT purposes. The measure was once restricted to “Bodies Corporate” which includes; companies of all types and limited liability partnerships. However, from 1 November 2019, grouping is additionally available for all entities, including; partnerships, sole traders and Trusts in certain cases.
HMRC has the vires to refuse an application for a VAT group, or remove a member if HMRC consider that it may lead to a VAT loss.
The Change
“The definition of ‘protection of the revenue’
Where this is considered necessary for the protection of the revenue, the VAT grouping legislation gives HMRC the power to:
- prevent a person joining a VAT group
- remove an existing member from a VAT group
We usually will not use our protection of the revenue powers if the revenue loss follows from the normal operation of grouping. If we feel that the revenue loss does not follow the normal operation of grouping, then we would consider using our protection of the revenue powers, such as:
- where we identify enhanced risks to the collection of revenue
- the use of VAT avoidance and distortion in the liability of the group’s supplies
In this context, ‘revenue loss’ means the VAT that is not charged when one company in a group sells to another company in the same group. This usually happens when one or more companies in the VAT group cannot reclaim all the VAT they pay because they make supplies that are exempt from VAT.
We will use our revenue protection powers if it looks like the main reason for VAT grouping someone is to ignore supplies from that company’s overseas branches to other members of the VAT group.
This applies whether that person is established in the UK or has a UK fixed establishment”.
VAT: Top 10 Tips for small businesses and start-ups
- Should you be registered for VAT?
If your income is above £90,000 pa of taxable supplies, you have no choice. But you can voluntarily register if below this threshold. There are significant penalties for failure to register at the correct time.
- Advantages of VAT registration: VAT recovery on expenses plus, perhaps; gravitas for a business
- Disadvantages: administration costs plus a potential additional cost to customers if they are unable to recover VAT charged to them (eg; they are private individuals) which could affect your competitiveness
More here
- Even non-registered businesses can save VAT
- Look to use non-VAT registered suppliers, or non-UK suppliers (however, this may count towards your registration turnover)
- If you are purchasing or leasing commercial property, consider looking for non-opted property or raise the issue of your inability to recover VAT in negotiations on the rent
- Take advantage of all zero and reduced rates of VAT reliefs available
- Challenge suppliers if you consider that a higher rate of VAT has been charged than necessary
- Consider using the appropriate simplification scheme
- Flat Rate Scheme (1% discount in first year of registration)
- Cash Accounting (helps avoid VAT issues on bad debts)
- Annual Accounting (can generate real, cash flow and/or administrative savings)
- Margin schemes for second-hand goods
- Make sure you recover all pre-registration and/or pre-incorporation VAT
VAT incurred on goods on hand (purchased four years ago or less) and services up to six months before VAT registration is normally recoverable.
- Are your VAT liabilities correct?
Many businesses have complex VAT liabilities (eg; financial services, charities, food outlets, insurance brokers, cross border suppliers of goods or services, health, welfare and education service providers, and any business involved in land and property). A review of the VAT treatment may avoid assessments and penalties and may also identify VAT overcharges made which could give rise to reclaims. Additionally, these types of business are often restricted on what input tax they can reclaim. Check business/non-business apportionment and partial exemption restrictions.
More on charities here
- Have you incurred VAT elsewhere outside the UK?
You may be able to claim this from overseas tax authorities. Details here
- Do you recover VAT on road fuel or other motoring costs?
Options for VAT on fuel: keep detailed records of business use or use road fuel scale charges (based on CO2 emissions)
If you need a car; consider leasing rather than buying. 50% of VAT on lease charge is potentially recoverable, plus 100% of maintenance if split out on invoice. VAT on the purchase of a car is usually wholly irrecoverable.
More here
- Remember: VAT on business entertainment is usually not recoverable but VAT on subsistence and staff entertainment is.
- Pay proper attention to VAT
- keep up to date records
- submit VAT returns and pay VAT due on time (will avoid interest, potential penalties and hassle from the VAT man)
- claim Bad Debt Relief (BDR) on any bad debts over six months old
- contact HMRC as soon as possible if there are VAT payment problems or if there are difficulties submitting returns on time
- ensure that the business is paying the right amount of tax at the right time – too little (or too late) may give rise to penalties and interest – too much is just throwing money away
- check the VAT treatment of ALL property transactions
More here
- Challenge any unhelpful rulings or assessments made by HMRC
HMRC is not always right. There is usually more than one interpretation of a position and professional help more often than not can result in a ruling being changed, or the removal or mitigation of an assessment and/or penalty.
We can assist with any aspect of VAT. You don’t need to be a tax expert; you just need to know one… We look after your VAT so you can look after your business.
VAT: New guidance on using postponed VAT accounting
HMRC has published (on 28 November 2025) a collection of new guidance on postponed VAT accounting (PVA).
The guidance covers what a business needs to do if it is using PVA to account for import VAT on its VAT returns.
The publication brings together all PVA guidance, giving detailed information about:
A VAT Did you know?
In Italy, coffee substitutes are subject to a reduced VAT rate of 10%. But bizarrely, regular coffee is subject to the standard VAT rate of 22%.
VAT and the 2025 Budget
Budget 26 November 2025
There was not too much excitement in the budget for indirect taxes (there was no change to the registration threshold, nor any VAT rates), but there were some minor changes.
VAT Grouping
The rules relating to cross border VAT grouping will be clarified. From the Budget date of 26 November 2025′ the UK will revert to its previous position on grouping to restore the “whole establishment” principle. HMRC also published Revenue and Customs Brief 7 (2025): Revised VAT grouping rules and the Skandia judgment, confirming that HMRC now considers that an overseas establishment of a business VAT grouped in the UK should be treated as part of that VAT group, even when located in an EU member state that does not operate whole entity VAT grouping.
This means that services provided between a UK head office and its overseas branch will once again be disregarded for VAT purposes, even if the branch belongs to a VAT group in another jurisdiction.
HMRC acknowledges that some VAT groups may have accounted for VAT in line with the previous guidance and may now be eligible to reclaim overpaid VAT through the error correction notification procedure.
This HMRC brief provides more details.
Private hire vehicles
Suppliers of private hire vehicle and taxi services will be excluded from the scope of the Tour Operators’ Margin Scheme (TOMS) from 2 January 2026, except where these are supplied in conjunction with certain other travel services. The government also published a response to the Consultation on the VAT Treatment of Private Hire Vehicles and HMRC published Revenue and Customs Brief 8 (2025): VAT Tour Operators’ Margin Scheme — supplies by private hire vehicle or taxi operators, which explains how to account for VAT as a private hire vehicle operator, a taxi operator, or business re-selling such supplies.
E-invoicing
The government will require all VAT invoices to be issued in a specified electronic format from April 2029. An implementation roadmap will be published at Budget 2026 further to consultation with businesses.
VAT treatment of business donations of goods to charity
There will be a new VAT relief to be be introduced on 1 April 2026 for business donations of goods to charity for distribution to those in need or use in the delivery of their charitable services, ie; in addition to goods donated for sale. HMRC also published a response to the Consultation on the VAT treatment of business donations of goods to charity, and a policy paper, VAT relief for business donations on goods to charities. The relief will apply to goods valued up to £100 per item, with a higher £200 threshold for essential electrical items to help tackle digital poverty. Eligibility is strictly limited to registered charities, meaning community interest companies (CICs) and social enterprises are excluded unless they register as charities. This corrects an anomaly where there is no VAT liability when businesses dispose of goods to landfill, but may incur one when donating those same goods to charity.
Motability
From 1 July 2026, vehicles leased through the Motability Scheme will be subject to 20% VAT on top-up payments for more expensive vehicles which are made in addition to the transfer of eligible welfare payments for more expensive vehicles on the scheme. The standard rate of Insurance Premium Tax will apply to scheme insurance contracts: VAT and Insurance Premium Tax: change to reliefs for qualifying motor vehicle leasing schemes – GOV.UK There will be no changes to vehicles designed for, or substantially and permanently adapted for, wheelchair or stretcher users.
ATCS
The Government has confirmed that the ‘Advance Tax Certainty Service’ (ATCS) will launch in July 2026 and provide clearances on corporation tax, stamp taxes, VAT, PAYE and the construction industry scheme, where there is no existing statutory route to certainty.