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UK VAT 

Introduction 

In the wake of Brexit, the United Kingdom (UK) withdrew from the European Union (EU) and the European Atomic Energy Community (EAEC or Euratom) on 31 January 2020. This mandates that businesses selling within the UK registers for the UK VAT number and UK VAT is levied on goods and services that are traded for consumption within the UK. "Value added" in VAT refers to the amount by which the value of a product is increased at each stage of production and distribution.

UK VAT Rules 

VAT Registration 

If you are an organization that is selling products or services into the UK, it is mandatory that you register for VAT in the UK.

VAT Rates 

If your buyer is from the UK where your business is domiciled then the VAT rate of UK is applied, irrespective of the buyer being a consumer or a business.

If your buyer is from a different EU member state, the VAT rates depend on the type of service you are providing:

  • Digital Products/Services:
    • Your buyer's member states' VAT rates applies (destination based)
  • Other services:
    • If you have not registered in your buyer's member state, the VAT rate of UK applies (origin based)
    • If you have registered in your buyer's member state, the VAT rate of your buyer's country applies (destination based). While configuring tax detals for non-digital products, you can select to apply origin rate.

However, irrespective of the type of service provided, if your buyer has a valid VAT number and is from a different member state, VAT is not applied. This is in keeping with the reverse charge mechanism which puts the tax liability on the business buying from you.

Location Validation (For Digital Services) 

If you sell digital products, you will have to collect and store proof of your customers' location. Apart from helping calculate an accurate VAT rate, this information will help prevent fraud. The following non-conflicting pieces of evidence are accepted as valid proof of location:

  • Customer's billing address country
  • The IP address of the device used by the customer
  • Location of the bank from which payment was made
  • The country code of SIM card used by the customer
  • The location of the customer's fixed land line
  • Credit Card's BIN

Chargebee collects the Billing Address country and IP Address of the buyer and will store this information for a minimum of 10 years in compliance with regulation.

UK VAT Invoice 

A UK VAT Invoice sent to a consumer must contain the following information:

  • Merchant's trading name and address
  • Merchant's VAT number
  • Invoice Date
  • Buyer's name or trading name, and address.

The invoice contains the applicable VAT rate for each line item and a subtotal amount before applying VAT and a final invoice amount after VAT is added.

Configuring UK VAT 

Step 1: Provide your Organization Address

Make sure that you have added your organization address in your Chargebee site without which taxes cannot be configured. To add your organization address, click Settings > Configure Chargebee > Business Profile.

Step 2: Enable Tax

To enable Taxes in your Chargebee site, click Settings > Configure Chargebee > Taxes > Configure Tax.

Step 3: Choose a Price Type (Tax exclusive or inclusive)

Once taxes are enabled, you will be redirected to a page containing all the currencies that you have enabled for your site.
This step is about configuring a price type for each currency.

This decides whether the price that you quote for your product/service/addon is inclusive of tax, where tax is included in the price, or exclusive of tax, where tax is added to the price. VAT invoicing rules call for your invoices to reflect the VAT rate that you are applying. This means that you have to set your Price Type to Tax Exclusive if you are selling to customers residing in the UK or EU.

Once you are done, click I've Reviewed my Price Types button.

Step 4: Configure UK (as a part of Tax jurisdiction)

If you are an organization selling digital or non-digital products within the UK, you need to configure tax details for UK seperately. To configure taxes for the UK region in your Chargebee site, follow these steps:

  1. In the Configure Taxes page, click +Add Region and select United Kingdom from the drop-down.

  2. Under Pick a mode of configuration, select your prefered mode of tax computation. If you are using a third party application for automated tax application on your Chargebee invoices, you can select the respective application. Select Manual to configure the tax rates for the UK region manually.

  3. Based on the type of product that you sell, select between I sell digital products and I sell Non-Digital products options in the UK VAT configuration page. This helps Chargebee apply an appropriate tax rate to your invoices, as UK VAT regulations specify different tax rates for digital and physical products.

    • I sell digital products: Select this option if you are selling online products such as e-magazines, tutorials or podcasts.
    • I sell non-digital products: Select this option if you are selling physical goods such as magazines, cosmetics or any other goodies.
  4. In the Tax details modal, enter the following information:

    • Select the Tax label.
    • Enter your Tax registration number for UK.
    • Enter the Tax name.
    • Verify the Tax rate, and click Save.
  5. In the UK tax region page, verify the following settings in context of the new UK tax laws:

    • Price type: Select the appropriate price type for your checkout prices in the UK region. VAT invoicing rules require that your invoices to reflect the VAT rate that you are applying. This implies that you will have to set your price type to Exclusive if you are selling to customers residing in the EU or UK.
    • Validation Options:
      • You can enable location validation as required. Chargebee collects certain address or location information as evidence of the customers' location.
      • VAT validation will be shown in a disabled state until the UK tax service becomes available. Until the UK tax service is available, make sure that you handle the VAT verification responsibility by yourself.
    • Collect Tax Registration Number: Enable this option if you expect your customers to enter their VAT Number while subscribing to your products.
    • Use local currency to display VAT in invoices: When this option is enabled, the amount of VAT payable gets displayed in the invoice currency as well as the local currency of the place of taxation. You can also choose to display the total amount excluding VAT and the total invoice amount in the respective local currency. The exchange rate applied for this purpose is as per the rates listed in the European Central Bank(ECB) website.
    • VAT Exemption Note for Exports: This option is available when your organization address is based in the UK. If you export goods to other countries from UK as part of your business, enabling this option adds a note in the respective invoices that refers to the VAT exemption for export transactions. You can edit the note to add or edit the text.
Note
  • Export VAT will not be exempted if other country tax is applied on the same invoice.
  • Keep in mind that your organization address must be in UK for the VAT Exemption Note for Exports to work.

Location Validation 

Chargebee collects the following address or location information as evidence of a customer's place of residence in adherence to the UK VAT location requirements. If you disable this feature, you have to collect the following evidence by yourself, to ensure that your customer is from the UK.

Customer's IP Address:

  • Hosted Pages: If you have integrated with Chargebee using the hosted pages, the IP Address of the customer is collected automatically.

  • API: If you use the Chargebee API, you have to pass the IP Address of the customer to Chargebee using the User Details Header  API.

Card BIN of the Customer:

The first six digits of a card carries the Bank Identification Number (BIN). BIN gives us the information about the card-issuing bank and hence can be used as a way to determine the customer's location.

  • Hosted Pages: If you have integrated with Chargebee using the hosted pages, the BIN of the customer is collected automatically.

  • API: If you use the Chargebee API, you have to pass the BIN of the customer using the card [number] parameter in the Create a customer  API.

Once the above evidence is collected, Chargebee attempts to match the customer's billing country with either their IP address or their card issuing country(from the card BIN). Only when either of these evidence matches with their billing country, location validation is successful and the customer can complete their purchase. If the Location Validation option is enabled and the validation fails, the customer can not complete the order.

Location Validation Failure

If your customer's location validation fails, they can not complete the order. They will receive the following error message:

If a customer signs up for a trial plan which involves no immediate payment, the subscription is created irrespective of whether the location validation was successful or not. The details of the customer are marked with a warning indicating that the location validation failed.

UK VAT Exemption 

There could be instances where a business customer does not have a valid VAT number, say when their sale is below the VAT threshold. In such cases, if you validate the customer as a legitimate business, Chargebee allows you to intervene manually and apply reverse charge - with or without a valid VAT number. You can do so while creating/editing the customer record, in the customer details page under Billing Address, or using the Update Billing Info option on the Action panel.

Under VAT settings, enable This is a business customer and select Enter the VAT Reg Number to specify the VAT number or select This customer does not have a VAT number.
In either case, your customers from a different member state other than yours will be exempted from VAT. This is in keeping with the reverse charge mechanism and the appropriate note will be displayed in the invoice.

Note
  • "This customer is exempt from tax payment" overrides the VAT settings where you mark the customer as exempt from VAT. For example, when the customer is marked exempt from taxes, and again under VAT settings, you select This customer does not have a VAT number, taxes will not be applied and at the same time the invoice will not display the VAT Exemption (reverse charge) note.
  • When you update the customers' VAT setting or remove their VAT number, a warning note will be displayed. You might make changes in the Chargebee UI or your customer might make changes from the Portal; in any case, the latest updated information will always be maintained for the VAT settings.

FAQ 

1. How to enable VAT Number to be displayed in the Hosted Pages?

For a transaction to be considered B2B, a valid VAT number has to be provided by the customer. If you use Chargebee's hosted pages, enabling the VAT number option will display the VAT Number field in the checkout pages.

To enable VAT Number in the hosted pages, if you're using:

  • Hosted Pages v2: Navigate to Settings > Configure Chargebee > Checkout & Portal > Field Configurations and enable the VAT Number field under the Tax Information section.
  • Checkout Pages v3: Navigate to Settings > Configure Chargebee > Checkout & Portal > Fields > Billing and enable the VAT Number field.

2. How does Chargebee apply taxes when Shipping & Billing addresses are present?
For tax calculation, Chargebee will consider the country mentioned in the shipping address linked to the Subscription.
in absence of a shipping address, the country in the billing address will be taken into account for tax calculation.
If both are not available, tax will not be calculated/ applied.

3. Can I change the Tax Exclusive/Inclusive settings?

Yes, you can change the Price type, i.e., whether the prices shown during Checkout should be Tax Exclusive or Inclusive.

4. What is the difference between VAT MOSS and non-MOSS registered merchants?

  • VAT MOSS Registered Merchants: If you have registered for VAT MOSS you will need to enter the VAT MOSS registration number.
    Chargebee will apply destination based tax for VAT MOSS registered businesses, i.e., the VAT rate of the EU Member State where the sale is made to, irrespective of the country you are registered in.

  • Non-VAT MOSS Registered Merchants: If you have not registered for VAT MOSS you will be given options to select the countries in which you have a presence and manually enter the VAT registration number for each country where you sell.

5. When is the Reverse Charge Mechanism applied?

In order to comply with VAT regulations, Chargebee applies the reverse charge mechanism only when:

  • The buyer possesses a valid VAT number (indicating that you are transacting with a business) and
  • The buyer is registered in a different EU country.

6. How does Chargebee differentiate between a B2B and B2C transaction?

VAT numbers are used to distinguish between your individual customers and your business customers.

  1. If you are selling to a buyer without a VAT number, the transaction is considered a B2C transaction and the buyer is considered an individual/consumer.
  2. If you are selling to a buyer with a valid VAT number, on the other hand, the transaction is considered B2B and the buyer is treated a business.

7. How does Chargebee handle location validation when there are multiple payment methods for a customer?

If there are multiple payment methods present against a customer, Chargebee will follow this protocol:

Chargebee will use the customer's IP address to retrieve the physical address of the customer. It will then attempt to verify the physical address with the customer's billing address.

If the country of the physical address (retrieved via the IP addresses) matches the country in billing address that the customer has provided, the customer's location will be marked as VALID.

If the IP addresses of the customer cannot be captured, Chargebee will attempt to verify the location of the customer by matching the issuing country (of the payment methods added) with the billing address.

If the issuing country of any of the customer's payment methods match the billing address, the customer's location will be marked as VALID.

If the above fail, the customer's location will be marked as INVALID.

Information
  • If the customer's billing address is changed, Chargebee will perform its validation checks again. If the recorded IP address information doesn't match the new billing address, the customer's location will be marked INVALID and you will be notified.
  • Chargebee performs its location validation at the time of a charge. A customer's location will not be marked as VALID/INVALID when they signs up for a trial plan or if their payment is not charged on sign-up. Upon charging the card, Chargebee will verify the location of the customer and attempt to collect the payment. The payment will fail if the customer's location validation fails.
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