Andrew Needham looks at what happens when a retailer sells to an overseas customer.
The VAT retail export scheme - also known as ‘Tax-free shopping’ - allows overseas visitors to claim a refund of VAT on goods they buy and export from the EU in their personal luggage.
The scheme cannot be used for services supplied to customers such as hotel accommodation, meals, and car hire; it’s for the sale of goods only.
Overseas visitors
The term ‘overseas visitor’ has widened since the scheme was introduced to include migrating EU residents; as a result, there are complicated rules for students and workers from overseas who come to live in the EU for limited periods. Also, it is not always easy to determine whether a traveller is an overseas visitor if they have dual nationality or homes in more than one country.
Only customers from outside the EU are entitled to use the scheme. These include:
- People who can prove they normally live outside the EU - they must prove this by (for example) showing their passport, identity card, driving licence, etc.;
- EU residents (including someone from the UK) who intend to leave the EU for a minimum of one year during the following three months - they must prove this by showing documents such as an overseas work permit, approved visa application, or a residency permit; and
- Overseas visitors studying or working in the UK and leaving the EU at the end of their studies or contract - they should show their visa or work permit to prove that they are leaving within the following three months.
HMRC estimates that VAT of more than £300 million is refunded under the VAT retail export scheme each year. Around 3.6 million tax-free shopping forms are presented at UK exit points annually and, of these, more than 80% are presented at Heathrow Airport.
How does it work?
In all cases, the customer must personally buy the goods (although someone else can pay) and fill in the relevant forms on the retailer's premises. The goods must be exported by the last day of the third month after purchase (for example, goods bought in January must be exported by 30 April). When they leave the EU, the customer shows the goods, receipts, and VAT refund document to a Customs officer, who stamps the refund document. This is used to reclaim the VAT from the retailer.
VAT should be charged and accounted for at the time of sale in the normal way. When the retailer receives the completed and stamped refund document from the customer and has refunded the VAT, it can zero-rate the sale in its records. If it has already accounted for VAT, it can zero-rate the sale by reducing the amount of output tax shown in Box 1 of its next VAT return.
Using a refund company
Some retailers use refund companies to handle the refund on their behalf. They usually give approved refund documents and tell the retailer when they have repaid the VAT to the customer. The retailer still needs to account for and adjust the VAT in their own records.
Some refund companies have refund booths at points of departure from the EU, where cash refunds can be made to customers before they leave the EU. They may charge the customer an extra administrative charge for this service.
Practical tip
If a retailer sells goods to overseas customers, it can refund them the VAT, but the system is still entirely paper-based and cumbersome.
