International Transactions Explained

The internet has made doing business internationally incredibly easy. You can sell a product to someone in France before breakfast, pay for software supplied from America at lunchtime and order stock from China before you finish for the day. From a business owner's point of view, they're just transactions. From a VAT point of view? Welcome to a whole new world of questions:

• Is it goods or services?

• Is the customer a business or an individual?

• Where are they based?

• Where did the goods actually go?

• Was VAT charged?

• Should VAT have been charged?

• Is there a reverse charge?

Suddenly that innocent-looking £29.99 software subscription has become considerably more interesting.

Let's look at what happens when UK businesses buy and sell outside the UK and, importantly, why the country written on an invoice isn't enough to decide how a transaction should be treated.

First things first: goods and services are different

Before looking at the country involved, the first question should usually be, are we dealing with goods or services? Physical goods actually move from one place to another. Services don't necessarily do that, so VAT uses place of supply rules to determine where a service is treated as supplied. The general rule for business to business (B2B) services is usually where the customer belongs, while the general business to consumer (B2C) rule is usually where the supplier belongs but there are numerous exceptions.

Digital services can have their own rules again. So unfortunately, "It's an overseas transaction" isn't a VAT code.

Selling goods outside the UK

Let's start with something tangible. You're a UK VAT-registered business and sell physical goods to a customer overseas. For businesses in Great Britain, goods that are genuinely exported outside the UK can generally be zero-rated for UK VAT, provided the relevant conditions are satisfied. However, zero-rated does NOT mean outside the scope of VAT. A zero-rated sale is still a taxable VAT supply. The VAT rate is simply 0%. That's important for your VAT records and VAT turnover.

Example 1: Selling goods to France

Imagine a VAT-registered business in England sells £2,000 of products to a customer in France and arranges for them to be shipped from England directly to France. For UK VAT purposes, those goods are being exported from Great Britain. Provided the conditions for zero-rating are met, the business may charge UK VAT at 0%. But there's another crucial part, you need evidence that the goods actually left the UK. HMRC accepts appropriate official or commercial evidence, supported by records demonstrating both that a sale took place and that the goods were exported.

That might include things such as:

• Courier documentation

• Shipping records

• Customer orders

• Despatch documentation

• Proof of delivery

• Payment records

Simply posting something to a French address and writing "export" in your bookkeeping isn't enough.

Example 2: Selling goods to America

Now imagine exactly the same £2,000 sale, except the customer is in New York. For a Great Britain business, the basic UK VAT position can look remarkably similar. Goods genuinely exported from Great Britain may qualify for zero-rating provided the relevant conditions are satisfied and you retain appropriate evidence.

So what changed after Brexit?

Is the EU now the same as the rest of the world? Sort of but we need a very large accountant-style asterisk next to that statement.

Before Brexit, businesses had specific rules governing movements of goods between the UK and EU member states. For businesses in Great Britain, goods sent to EU countries are now generally exports from the UK, much like goods exported to other overseas destinations. Those old pre-Brexit rules shouldn't simply be applied because your customer happens to be in France or Germany.

However, saying "The EU is exactly the same as everywhere else" would be an oversimplification.

You may still have VAT obligations in the destination country, particularly with certain consumer sales. And Northern Ireland has separate arrangements for certain movements of goods involving the EU. In other words, Brexit simplified absolutely nothing. It merely gave us a different collection of rules to learn.

Selling through Amazon, Etsy and other marketplaces

Online marketplaces introduce another layer. If you're selling physical goods internationally through Amazon, Etsy, eBay or another marketplace, don't automatically assume your VAT responsibilities disappear because the platform is involved.

Depending on:

• Where your stock is located

• Where your customer is located

• Whether the customer is a business or consumer

• The value of the consignment

• Whether the marketplace is responsible for collecting local VAT

there may be UK and overseas VAT considerations.

If you're storing stock overseas, for example, using an overseas fulfilment centre, the situation can become more complicated again. The important message is, Understand where your stock is and where it's going.

Selling services outside the UK

Services work differently because there's nothing necessarily crossing a border. Instead, we need to establish the place of supply. For many services, the general B2B rule means the place of supply is where the business customer belongs. If a UK business supplies a qualifying service to a business customer overseas, the supply may be outside the scope of UK VAT rather than zero-rated.

Notice the distinction: Exported goods → potentially zero-rated UK VAT

Certain services supplied overseas → potentially outside the scope of UK VAT

Those are not the same thing.

Example 3: Providing a service to an overseas business

Imagine a UK marketing consultant provides £3,000 of consultancy services to a genuine business customer based in Canada. Under the general B2B place-of-supply rule, the service is normally treated as supplied where the customer belongs. That means UK VAT would generally not be charged. The Canadian customer may then have its own obligations under Canadian tax rules.

However, there are exceptions to the general place-of-supply rule, including services connected with land, events and certain other activities. Don't assume: Overseas customer = no UK VAT.

First establish what service you're actually providing.

Digital services deserve their own section

Digital services are particularly interesting. We're talking about things such as:

• Software downloads

• Apps

• Web hosting

• Online subscriptions

• Downloadable digital products

• Automated online services

• Certain electronically supplied content

HMRC specifically identifies digitised products, software, web hosting and certain automatically delivered online services as electronically supplied services and one important factor is whether you're selling B2B or B2C. Selling a digital service to a business overseas isn't necessarily treated in the same way as selling the same service to an individual consumer.

Example 4: Selling digital services to an EU consumer

Imagine a UK business sells an automated digital product to an individual customer in Spain.

You cannot simply say: "They're overseas, so there's no VAT."

B2C electronically supplied services have specific place-of-supply rules. You may need to consider VAT in the country where your consumer belongs and whether an appropriate registration or scheme is required. This is particularly important for businesses selling digital products at scale.

One £10 download may not feel terribly international. Ten thousand £10 downloads certainly can be.

Now let's turn it around: buying goods from overseas

Suppose instead of selling goods, you're purchasing them. Perhaps you buy £5,000 of stock from China. The supplier sends you an invoice for £5,000 with no UK VAT on it. Does that mean there's no VAT?

No.

The goods are being imported into the UK, which can create import VAT and potentially customs duty.

Example 5: Importing £5,000 of stock from China

Your supplier invoices: Goods: £5,000 The goods arrive in Great Britain. There may then be:

• Customs declarations

• Customs duty

• Import VAT

• Courier or freight charges

For VAT-registered businesses, Postponed VAT Accounting (PVA) can allow import VAT to be declared and recovered on the same VAT return, subject to the normal input-tax recovery rules, rather than paying the import VAT upfront and reclaiming it later.

If import VAT is paid rather than postponed, the appropriate import VAT documentation becomes important. HMRC refers to the C79 import VAT certificate for businesses reclaiming import VAT where PVA hasn't been used.

The supplier's invoice isn't necessarily enough

You have a perfectly good invoice from your Chinese supplier. Excellent. That invoice doesn't necessarily prove the amount of UK import VAT you're entitled to reclaim. Your import records matter too.

If you're using PVA, you should ensure your postponed import VAT statements are being obtained and reconciled with your VAT records. This is an area where good paperwork really earns its keep.

Buying services: International Transactions

This is probably the international transaction that most businesses encounter without even realising it. Think about your monthly subscriptions. Your business might use:

• Design software

• Cloud storage

• Website hosting

• Social media services

• Advertising platforms

• Project management software

• Video conferencing

• CRM systems

Many of those suppliers may be based outside the UK and that brings us to the reverse charge!

Reverse charge

Don't be put off by the name. The reverse charge sounds considerably more dramatic than it actually is. When a UK business receives qualifying services from a supplier outside the UK and the place of supply is the UK, the reverse charge can require the UK customer to account for VAT as though it had both supplied and received the service. It applies to almost all B2B supplies of services under the general rule, subject to exceptions.

Example 6: The £100 overseas software subscription

Imagine your UK VAT-registered business buys a qualifying software service from an overseas supplier.

The Invoice shows:

Software subscription: £100

VAT: £0

It's tempting to enter: Software £100. No VAT.

Except the reverse charge may apply. Assuming the service would be standard-rated in the UK, you calculate UK VAT as though you had supplied the service yourself. At 20%, that's: £100 × 20% = £20 VAT

For a fully taxable business entitled to recover all of the VAT, the VAT return would generally include:

• Box 1: £20 output VAT

• Box 4: £20 input VAT reclaimed

• Box 6: £100 value of the supply

• Box 7: £100 value of the purchase

So financially, the £20 often cancels itself out for a business entitled to full recovery. But it still needs recording. HMRC specifically sets out those VAT return entries for reverse-charge services.

"But they didn't charge me VAT…"

We hear this one a lot. An overseas invoice shows: VAT: £0 so surely there's nothing VAT-related to record? Unfortunately not. The reverse charge exists precisely because the overseas supplier may not be charging UK VAT. Instead, responsibility for accounting for the VAT moves to the UK business receiving the service. No VAT on the invoice does not automatically mean no VAT treatment is required.

What if you're not VAT registered?

This is where the reverse charge can become particularly important. If you're receiving services from overseas, the value of reverse-charge supplies can, in relevant circumstances, need to be considered when determining whether you're required to register for VAT. So a business sitting comfortably below the VAT registration threshold based purely on UK sales shouldn't automatically ignore substantial overseas service purchases. If your business buys significant services from overseas and you're not VAT registered, it's worth checking the position rather than assuming it doesn't concern you.

What about foreign VAT?

Another common mistake is seeing VAT on a foreign invoice and reclaiming it as though it were UK VAT. For example, an overseas supplier might charge:

• French VAT

• German VAT

• Spanish VAT

That is not UK input VAT. You can't simply put foreign VAT into the UK VAT return as though HMRC charged it. There may be mechanisms for recovering certain overseas VAT depending on the country and circumstances, but that's a separate process.

Foreign currency adds another layer

Of course, international suppliers don't always invoice in pounds. You might receive €1,000 or $2,000 rather than a nice convenient sterling amount. Your accounting records still need a sterling value. If your bookkeeping software supports multicurrency, it can often:

• Record the invoice in the original currency

• Convert it into sterling

• Match the eventual payment

• Record any exchange-rate gain or loss

This makes international transactions considerably easier to manage.

What if your software doesn't support multicurrency?

You can still deal with foreign currency transactions. You'll need to convert the transaction into sterling using an appropriate exchange rate for the relevant VAT/accounting date. Then, when you actually pay or receive the money, the sterling amount may be slightly different because exchange rates have moved.

For example:

Invoice issued:

€1,000 = £860

By the time it's paid:

€1,000 = £872

That £12 difference doesn't mean your original purchase suddenly became more expensive in accounting terms. It's an exchange difference.

If your bank then charges a £5 foreign transaction fee, that's another separate transaction again.

International bookkeeping really does like to make one payment feel like three.

What records should you keep?

International transactions often require more documentation than domestic ones. Depending on the transaction, keep things such as:

• Supplier/customer invoices

• Proof of payment

• Shipping documentation

• Customs paperwork

• Courier documentation

• Proof of export

• Import VAT records

• PVA statements

• Evidence of where customers belong

• Business VAT/tax identification details where relevant

• Marketplace statements

For exports, evidence is particularly important because zero-rating depends on satisfying the conditions. HMRC's current guidance says evidence should demonstrate both that the transaction took place and that the goods actually left the UK.

The mistakes we see most often

International VAT mistakes often start with perfectly reasonable assumptions.

❌ "It's overseas, so it's zero-rated"

Not necessarily. Goods and services have different rules, and services may be outside the scope rather than zero-rated.

❌ "There's no VAT on the invoice, so there's nothing to do"

Not if the reverse charge applies.

❌ "It says VAT, so I'll reclaim it"

Foreign VAT isn't automatically reclaimable on your UK VAT return.

❌ "The supplier invoice proves my import VAT"

Not necessarily. Import VAT requires the appropriate UK import documentation.

❌ "Everything from the EU works the way it did before Brexit"

Unfortunately not.

❌ "My software will work it out"

Software is extremely useful but it can only work correctly if the transaction is given the correct VAT treatment in the first place. A computer can calculate the wrong answer remarkably efficiently.

So how do you decide the VAT treatment?

When you're looking at an international transaction, don't start with "Which country is on the invoice?" Instead, ask:

• Is it goods or services?

• If it's services, what type of service is it?

• Is the customer a business or a consumer?

• Where does the customer belong?

• For goods, where are they physically moving from and to?

• Who is responsible for the import or export?

• Is the business VAT registered?

• Does the reverse charge apply?

• Could there be VAT obligations in another country?

Those answers give you a much better starting point.

Final thoughts

International business isn't just for huge companies anymore. A sole trader can sell digital products around the world from their kitchen table. A small retailer can source products directly from China.

A limited company can have half a dozen overseas software subscriptions without ever consciously deciding to "trade internationally". That's why understanding the basics matters. The biggest lesson is probably the simplest: Never decide the VAT treatment of an international transaction based solely on the country written on the invoice. Goods, services, digital services, business customers, consumers, imports and exports can all be treated differently. Sometimes that £29.99 subscription you've barely noticed deserves considerably more bookkeeping attention than you'd expect.

International trade may have become incredibly easy. International VAT clearly didn't get the memo.