VAT -Import from EU countries : Chapter 25.12

Let’s take your 2nd question first as this is a fundamental point – a company / business making exempt supplies will not charge output tax on the sales they make, but they will no doubt incur costs from standard rated suppliers to them and the input tax that they incur on these costs incurred will not be recoverable as it is attributable to exempt supplies!

On your first question the very reason that we have the rules is to STOP what you suggest from happening and to ensure that a business incurs the same net cost whether they buy from another UK supplier or from an EU supplier.

If a UK business buys goods from a UK supplier for £10,000 (excl VAT) they will pay £12,000 (inc VAT) to the supplier. If the business makes taxable supplies then it can recover / reclaim the input VAT of £2,000 and therefore incur a net £10,000 cost. If they make exempt supplies they cannot recover the input VAT and hence incur a £12,000 net cost.

If the business buys in from an EU supplier it is zero rated so they will pay the supplier £10,000 and then through the reverse charge system show the £2,000 on the VAT return as both input VAT and output VAT IF they make taxable supplies which therefore has a nil effect on the VAT payable – thus incurring a net cost of £10,000 as above.

If the UK business however makes exempt supplies they show the same £2,000 as output tax on their VAT return BUT as they make exempt supplies they cannot recover input VAT so they pay over £2,000 to HMRC along with £10,000 to the EU supplier – their net cost is £12,000!

If we did not apply the reverse charge system for VAT there would just be a £10,000 payment to the EU supplier and that would of course mean that everybody making exempt supplies would buy in from the EU!!