So, you have formed your UK entity and have started to incur costs for it. But how do you account for the extra 20 per cent VAT charged to you?
UK VAT is not treated the same as the US Sales Tax. UK VAT is not meant as a tax on most businesses but as a charge to individuals, the ultimate end users of your service or product.
When US businesses set up in the UK, they often unnecessarily incur VAT as a cost. For example, if the UK office lease is signed in the name of US entity the VAT incurred cannot be reclaimed by the UK entity. This would be the same for any supplier who invoices the US entity. Make sure all UK costs are invoiced to the UK entity.
Next, let’s assume the US parent entity is going to continue to bill all customers from the US and the UK is just a sales and marketing office. If the US entity needs servers in the UK to support their UK customers, who is going to purchase the servers? If they are purchased outside the UK and imported into the UK, you will likely need to use the UK VAT number to bring them through customs. This means your UK entity will be charged the Import VAT but, as the servers are not for the UK’s trade, it won’t be able to reclaim the VAT. The US can submit an annual claim to recover the VAT but there will be a long delay in getting these funds back.
Another scenario could be where the UK entity is going to bill UK and EU customers directly. Do you know when to charge VAT on your UK sales invoices and at what rate? And do you know what a compliant VAT invoice should contain?
Finally, if the US entity has UK contractors billing the US entity, make sure they are only charging you UK VAT where appropriate. Typically UK VAT would only be charged to UK entities for contractor services.